Elevation sickness

Question: What can investors expect to see from the Fed this year?

Steve Chiavarone: The Fed's making good progress on their fight against inflation. After having sat on the sidelines for quite a while, they've moved aggressively. We're starting to see inflation come down, that's allowed them to downshift in terms of the size of the rate hikes. But the job isn't over yet, or at least it's not clear that the job is over yet. You've seen headline readings come down, you've certainly seen disinflation in goods prices. But services are still elevated, wage inflation is still quite strong, and that really is the crux of the issue. Can we get the labor force back into some equilibrium so that we can trust that we're really on a sustainable path to 2%? And that's just going to depend on the incoming data. It's something we're going to have to watch, and it's something that the Fed will have to evaluate. But the news, right now, is that we are finally starting to move in the right direction. In terms of the Fed's path going forward, we expect that the Fed's going to continue to hike here for a little bit. Now they've obviously stepped down, that does bring us one step closer to a pause. The market seems very certain that, that pause, is either in March or May. We're not so sure. We think it will really be data dependent. And we have to see inflation continue to move down sustainably, towards that 2% level. As for cuts, we generally do not see cuts in 2023. Now, we don't totally rule that out if we do find ourselves in conditions that are consistent with a recession in the back end of the year. But our expectation is that, once the Fed gets to its terminal rate, which is five-ish percent, we don't know exactly what that number is, but five-ish percent, we expect them to be in pause mode, not pivot mode. Which means rates are going to be elevated for some time. And we think for most, if not all, of 2023.