Investors are racing to work out how much monetary policy tightening the economy can handle as the U.S. Federal Reserve embarks on its rate-hike cycle, with some expecting an even steeper path ahead as others fret over possible missteps.
"It is good that the Fed left sort of unclear when they will start reducing their balance sheet," said Troy Gayeski, Chief Market Strategist at FS Investments. "We have real concerns over whether the markets can continue to function if the Fed starts to drain their balance sheet more aggressively.
An inverted yield curve has been a reliable predictor of past economic downturns in key parts of the curve, although the closely-watched parts of the curve most associated with recession have not yet flipped."The longer that curve stays flat or begins to flatten, or if it does start to invert throughout the curve, that would be a concern of ours," said Joe Bell, chief investment officer at Meeder Investment Management.
"They don't have a great record in engineering 'soft landings'," said Matthew Nest, global head of active fixed income at State Street Global Advisors, who expects the economy to shrink in the first half of 2023.