What Could Possibly Go Wrong?
Our “New Stagflation†thesis for the US economy is playing out and the Fed has adjusted their reaction function accordingly.  With markets pricing in a Fed that remains sidelined, it is worth considering what might happen if this notion proves to be wrong. That is, how would the Fed’s Watchful Waiting stance evolve if inflation accelerated sharply?  What would the Fed likely do if the risk of a recession or deflation increased sharply?  This week’s note takes a look at both extreme scenarios and offers insight on how the FOMC would likely think about these situations.  We also discuss our rationale for why US long-term yields are headed down and the USD is headed up.Â
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