Recent deceleration in U.S. inflation levels notably changed expectations for economic outcomes related to monetary policy. While inflation moderation supports markets, we do not believe that the full economic impact of the Federal Reserve’s tightening efforts is sufficiently priced in. Stagflation expectations are falling, with markets pricing in a shift toward the kind of moderation associated with a soft landing. Our market implied-probabilities framework suggests investors believe that the probability of a soft landing is close to 75%. Still, recession remains our base-case scenario.
