The Fed Has to Keep Tightening Until Things Get Worse

Bridgewater

Larry Cofsky, Albert Chen

Research

6 Pages

Bridgewater Associates argues the Fed is boxed in by high inflation and an unusually tight labor market, so it keeps tightening until growth and markets crack. With core inflation above 6% and unemployment at 3.7%, they think a pivot is unlikely, and financial conditions may need to get meaningfully worse. They also warn equities still look too optimistic about the pain required.

Date published: September 22, 2022

Key Takeaways

Fed boxed in: Inflation and labor tightness push policy toward more tightening, not a quick pivot.
Markets too hopeful: Risk assets may still underprice the slowdown needed to bring inflation down.
Pivot needs proof: Clear disinflation or deeper asset weakness may be required before easing begins.
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