Chart of the week

Despite Fed pause, financial conditions tighten further

Despite expectations for a Fed pause, this week’s chart looks at other financial conditions, which have tightened significantly in recent months.

September 8, 2023 | 2 minute read

Fed Funds expectations vs. WTI and 10-year real Treasury yield

Source: Bloomberg Finance, L.P., as of September 8, 2023. Data begins on March 13, 2023. 10-year real Treasury yield refers to the 10-year Treasury yield less inflation.

  • Economic data has continued to come in strong, but investor sentiment has cooled off over the past month as the firm macro picture has begun to yield other challenges, including notably tighter financial conditions.
  • As the chart shows, investor expectations for the Fed terminal (peak) rate have edged gradually higher since the March 2023 Silicon Valley Bank-driven reset.
  • Perhaps more notably, though, “shadow tightening” in the face of rising oil prices (gray line) and markedly higher real Treasury rates (orange line) have caused some cracks to appear in the soft or no economic landing narrative that largely drove markets higher through most of the summer.
  • Fed policymakers seem disinclined to let their foot off the monetary gas pedal amid still-solid economic data and rising energy prices, opening the door for a potentially more challenging and volatile market environment through the coming months.

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