Fed Hawkishness Falls Short of Bullish Rate Hike Expectations

The Federal Reserve's recent shift towards a more hawkish stance has sparked debate about 'bullish rate hikes', where tightening cycles coincide with falling bond yields.

A new report from Oxford Economics argues that there is little basis for optimism in this scenario, as the conditions necessary for bullish hikes are not met in the US economy.

Bullish hikes typically occur when a central bank tightens aggressively in an economy where prices and wages adjust quickly to inflation shocks. However, this combination is more characteristic of emerging markets than the US.

The report notes that while US inflation has become stickier since the pandemic, past inflation and expectations now play a larger role in current price-setting, which could lead to further rate hikes by the Fed.