OPINION:
The key dynamic in global markets has been the broad-based tightening in financial conditions as central bankers and policymakers face the ongoing challenge of reducing inflation — a dynamic that has seen elevated market volatility across almost all asset classes.
From here policymakers can either run lower rates for a longer period of time which would see higher inflation (although is likely to be politically tempting to avoid a hard landing), or they can move more quickly to remove the inflationary excesses currently in the system. This would see greater short-term pain and thus be less politically popular, but likely to be better for the economy and markets in the longer term.
We still think policymakers hope to bring inflation down without a recession and are open to doing this over an extended period if needed.
But they appear to want to see more consistent evidence that every aspect of this process is on track and proceeding fairly quickly, and they appear less anxious for now about accidentally overtightening in light of the strength of the labour market.
