Everyone loves to asks the 'experts': What will the market do now? What will be the GDP for the year? What will the Fed (or RBI) rate be by end 2022?

There things which are inherently unknowable, like the market - after all who knew at the beginning of 2020 that hotel and airline revenues would go to zero for most of that year. The Russia-Ukarine conflict didn't even make to the list of the top 10 risks listed by The Economist in January 2022!

But what about things like the Fed rate? Those are decisions made by a person or a team. THEY should know what they are going to do, shouldn't they?

The truth is even the Fed doesn't know what its terminal rate will be!

Depends on what happens to the inflation, growth, unemployment and a whole lot of other macro variables.

It is still about probabilities & fine tuning as the data comes in.

Probability and ambiguity are the characteristics of markets, indeed life itself - a difficult lesson to learn but learn it, you must.

I have found it to be one of the harder lessons to teach the rookies, who come from an educational system where every problem has a single, 'correct' solution.

Oh yes, coming back to the Fed rate, my take:

Tip One: No matter what happens to equity and debt markets, the Fed is unlikely to change course unless it seeing inflation cooling.

The famous Fed Put is off the table for now.

The Fed’s projection is for ~4% year on year inflation by year end, which if missed, is poised to have significant ramifications for risk assets globally.

Tip Two: The language from the Fed remains that of data dependence i.e. prepared to do more (than priced) if things don't go their way and less if they do.

Therefore: Follow the data.

From the desk of Devina Mehra

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