Good News is Bad News is Equilibrium

Surprisingly strong jobs, PMI, retail sales – and CPI – data have driven the market-implied path of the funds rate to new cycle highs, now showing two-and-a-half rate hikes by summer, and only one rate cut by next January. The old “good news is bad news” cliché doesn’t capture the dynamic though: this is an equilibrium in which, while the funds rate is higher, the economy is no more vulnerable than it was before because it has gotten stronger at thesame time. This may point to a return to a pre-GFC “old normal,” as implied by the S&P 500 equity risk premium having mean-reverted to 2007 levels. Recessions require both a shock and vulnerability to shock. The implied funds path is a mild shock, and the economy is very shock-resistant. We rule out a hard landing.