The disjunction between market-community and policymakers beliefs is the feature of the situation that makes me most worried about the business cycle outlook. Market oesrrvers understanding how and what the Federal Reserve believe, but are right now betting that events will give it a shock and force it to reverse policy. Such confidence that reality will give a shock that olicymakers will not be able to ignore is worrisome: Muhammed El-Erian: Why Fed and Markets Don't Agree on Prospects for Interest Rates: "The markets, anticipating no hikes this year and cuts thereafter, estimate the fed funds rate in 2020 a full percentage point below the median of the central bank's dots.... There simply isn’t enough data as yet to point with a high degree of confidence to a dominating explanation or combination of explanations... historically based analytical models may not be sufficiently structurally robust to capture this moment...
...Investors should take away three messages: We are in a period of inherently greater economic, policy and financial uncertainty, instability and unpredictability; the main risks to the U.S. economy are less organic than political, external and financial; and the risks of a policy mistake and/or market accident are increasing. All of this calls for well-constructed tail protection and readily available cash to exploit the possibility of subsequent technical overshoots...
#noted
