Fixed Income Outlook April 2022: To Neutral And Beyond

The US labour market is at full employment with annual wage gains of 5% to 6%. This pace is likely incompatible with the Fed’s 2% Personal Consumption Expenditures (PCE) inflation target at current levels of productivity growth. We anticipate policy rates between 3.25%–3.50% by year-end 2022 with additional increases possible in 2023. Our view is that the Fed needs to engineer a significant economic slowdown, and most likely a recession, to bring wage pressures to a level consistent with a 2% PCE inflation target.