Source: TD Securities
Likely Causes
2024 Fed Response
Rates Market Reaction
Softer Landing (Baseline)
Consumers/activity remain at or below trend-growth amid a still largely resilient labor market, with inflation staying on a gradual path toward 2%
Gradual 75-125bp of cuts, starting in Q2 2024
Real and nominal rates remain elevated, but gradually drift lower
Rates gradually bull steepen
Companies and consumers more resilient to higher rates amid lower leverage/termed out debt
Probability: 60%
Real and nominal rates move rapidly lower as the Fed cuts rates faster
Curve bull steepens rapidly
Rates Market Reaction
150bp or more of cuts, starting in May
2024 Fed Response
Consumer spending decelerates
Likely Causes
Harder Landing
Company profit margins compress
Labor market softens and wages slow
Higher real rates weigh on lending
Front-end sells off as cuts are pushed out, curve re-inverts
Real 10y rates test top end of 2.25-2.50% range
Rates Market Reaction
Fed postpones cuts, trimming rates by 25-50bp.
2024 Fed Response
R* likely higher than expected
Growth remains above trend
Core inflation remains sticky amid service sector strength
Likely Causes
No Landing, Inflation Remains Sticky at Higher Levels
In extreme scenario the Fed threatens more hikes.
Breakevens rally
Softer Landing
Harder Landing
No Landing
Probability: 35%
Probability: 5%
Probability: 60%
Probability: 35%
Probability: 5%