Aggressive central bank rate hikes and the resulting bond bear market in 2022 were extremely painful for investors. With 2023’s banking crisis adding to a backdrop already at risk from the hikes, economies must now cope with the frictions and long tail of the crisis. In light of the recent shocks and the Fed’s constrained ability to contain a broader crisis, our base case calls for “weakflation”, i.e., weak growth and inflation of more than 2%, but falling.
