Investors are becoming increasingly confident that major central banks will change course soon. They expect rates set by the Fed, the Bank of England and the ECB to reach their peak by this spring. At that point, they’re expected to hold rates steady while they assess the impact on inflation.
One challenge, though, is that the full impact is unlikely to become apparent until next year.
Take the housing market, which is very sensitive to changes in interest rates and is closely monitored by central bankers. In the United Kingdom, more than 1.4 million households need to renew fixed-rate mortgages this year. Most had been set at interest rates below 2%.
When their mortgage costs rise, they could pull back spending. That could ease inflation, but also boost the risk of recession. (The United Kingdom is the only Group of Seven economy that the IMF predicts will shrink this year.)
Another major unknown is the job market. The Fed wants to cool hiring and wage increases, which can drive up inflationary pressures. It has acknowledged that “there’s going to be a bit of pain to achieve the inflation target,” seeing job losses as the “lesser of two evils,” Rossiter said.