The volatility of short-term US interest rates peaked a couple of weeks ago, and has since receded slightly. But markets are still processing conflicting stories:

• on the one hand, recent macro data has been mostly positive, presenting a case for stronger economic growth
• on the other, there are signs of resurgence of COVID, and the European vaccine saga is tampering the mood

Understandably, fixed income markets haven't yet fully figured out the endgame.

What is clearer is the path of hikes: we are currently looking at liftoff in the third quarter of 2022, something that hasn't moved much in the past weeks. That should start slowly and be followed by more forceful actions in 2023 and 2024:

Note that this story is only true in the US, as our last chart above shows how little rates are expected to change in other markets over the next 5 years.

What is less clear for markets at the moment is inflation expectations. A year after a surprisingly (at least to us) deep and lengthy liquidity crisis, the worry pendulum has shifted the other way: isn't there too much liquidity for a post-covid return to normalcy ? Can the Fed prevent unbridled inflation? Let's answer the last question first: there is no doubt that medium- to long-term inflation will be contained, and that's why the forward inflation curve is currently inverted. What is more uncertain is how much and how long a potential inflation spike might last. That is why the nearer side of the forward curve is currently all over the place:

The bottom line: we think that the Fed is right not to be unduly concerned about inflation at this stage, as we don't even know when things will really go back to normal, let alone go wild (as some seem to expect).