The Fed has been peddling a wonderful narrative:
Rates will rise somewhere in the 4.75-5.25% range and then flatten out, perhaps for all of 2023. Despite that, the economy will cruise to a soft landing with a recession largely avoided. Then inflation will slowly come down to target in 2024 and rates will decline back into the 3% range.
History shows that such outcomes are rare.
Last week, Deutsche Bank published a good chart of Fed rate hiking cycles and how history shows that it often takes a long time before rates are cut and that in some cycles it takes a second round of hikes -- perhaps at an aggressive pace -- to tame inflation.
I can see the case for almost any scenario right now. Consumers still appear to be flush and there are no big cracks in the jobs market. In the bigger picture, demographics may keep the jobs market tight and green transition spending will be inflationary. Against all that is a 30-year history of suppressed inflation due to globalization and anchored expectations; it's too early to say that's done or reversing.
However in terms of trading, next year will be about a harder landing, stubborn inflation or both. It will be a tough environment to navigate.
