The Fed's problem is simple - the market has reflexively built-in a message that not just 'Peak Fed Tightening' is behind us already - but that we're about to cut Rates in early '23, as evidenced by US 10Y Real Yields collapsing 70bps in two weeks—which has then dictated a wholesale risk-asset explosion higher from Equities to Credit to Long Duration, as US financial conditions then impulse ease in an extremely counter-productive dynamic for the Fed's "inflation fighting" mandate.

Financial conditions have eased in the same proportion as the last four mini-easings - all of which have seen lower highs (tighter 'peak easing') and lower lows (tighter)...

Why is The Fed's position a problem?

Simple, McElligott explains, pulling the bullish blinkers back from the bull crowd's eyes:

...with the remarkable US Labor market strength (U-Rate at 53 year lows) alongside structurally imbalanced Commodities / Energy / Housing, Inflation is simply in no position to return to the "old world" of 2% target without a further escalation of FCI hawkishness from the Fed...

...but all while the market is already EASING policy preemptively on nobody's behalf, now seeing "just" a Terminal Rate at 3.26% achieved btwn Dec '22 / Feb '23 before implied Fed cutting soon thereafter.

Rate-hike expectations have plunged and subsequent rate-cut expectations have soared...