All of the central banks we monitor are plotting an exit from the highly accommodative policies put in place two years ago. But divergence is re-emerging, with the Fed and BoC now set to lead the charge toward a more neutral stance. Having committed to keep rates low until their economies fully recovered, both are increasingly worried they\u2019ve fallen behind the curve on inflation. Rapidly-declining jobless rates, broadening inflation and ongoing commodity and supply chain pressures have added to the urgency to scale back stimulus. Last cycle\u2019s playbook for gradual tightening is being thrown out the window with both central banks hinting at larger and faster rate increases to come. Rates markets were already priced for a more aggressive approach to fighting inflation, and have only been encouraged by the recent shift in rhetoric. Meanwhile, those (including ourselves) that put more weight on previous central bank guidance are marking their policy rate forecasts higher. We now see both the Fed and BoC hiking by 50 bps at their next meetings, getting a head start on the move toward neutral (2% or higher) by year end. In essence, the tightening we expected over the next two years is now likely to come by the end of 2022.<\/p>\n
Bond markets were already under pressure from rising breakeven inflation rates in the wake of Russia\u2019s invasion of Ukraine and associated commodity price increases. Central bank hawkishness in the second half of March only added to the pain, with US Treasuries recording their steepest monthly losses in decades. Higher yields spilled over into other jurisdictions where central banks aren\u2019t expected to move as quickly as the Fed and BoC\u2014German 2-year yields, for instance, rose into positive territory for the first time since 2014. Equity markets have taken the prospect of higher interest rates in stride\u2014the week of the Fed\u2019s hawkish March meeting was the S&P 500\u2019s best in more than a year\u2014even as flattening yield curves flag growing recession risk. Investors are hoping central banks can deliver a soft landing, reining in inflation without reversing recent labour market gains. Balancing those objectives will be much more challenging as rates approach neutral heading into 2023, and we expect the Fed and BoC will be much less active next year as they seek to prolong the current cycle. <\/p>\n