With the balance of inflation risks swiftly tilting to the downside, markets expect central banks to begin normalizing policy settings in the coming months. Federal Reserve Chair Jerome Powell’s comments during a mid-December post-decision press conference were widely read as implying a willingness to follow canonical policy guidelines—like the Taylor Rule—in moving even before evidence of a downturn arrives. Further, Fed Board Governor Waller’s late-November comments—in which he explicitly said reducing rates would have “nothing to do with trying to save the economy or recession”—have helped ratify market expectations for a fast and furious cutting cadence. The European Central Bank’s Isabel Schnabel, Huw Pill at the Bank of England, and even the Bank of Canada’s Governor Tiff Macklem. have hinted at easing ahead.

Market-implied expected change in policy rate, %

Long-term yields have fallen precipitously from their October highs; asset prices are nearing post-pandemic peaks; and a range of financial conditions indices – which attempt to measure the cost and availability of money in the economy – are back in accommodative territory.

G7 gross domestic product-weighted financial conditions index