May you live in interesting times, the Hermit (reversed)

Leitmotif 2: Central bank credibility

The Hermit Tarot card, upside down, signifies loneliness, isolation, a lost path

My conviction that Inflation’s final mile will be slower and bumpier than expected places Fed credibility in the spotlight for 2024.  Indeed, I would argue that even if inflation pans out exactly as the Fed forecasts – though their recent track record does little to inspire confidence – the December FOMC meeting’s confused early pivot to dovish forward guidance raises uncomfortable questions about their true target and needlessly risks their credibility.  I worry that the December meeting may be looked back upon by future economic historians as one of the institution’s biggest policy errors.  In contrast, the prudent risk-management approach to communication by the European Central Bank and Bank of England, even amid clearer evidence that inflation is returning to target, does much to repair earlier lost credibility, and ironically might allow them to ease policy sooner.

In this second of eight Leitmotifs in my 2024 prognostication, May you live in interesting times, I tackle the central bank credibility and its implications for expected future policy rates, term premia and volatility.  Given the fundamental role of US dollar rates in the global financial system, any hit to the Fed’s credibility will have broad implications for asset allocation and, regardless of ECB and BoE action, other rates markets.