We are going through an asset price recession and not an economic recession. Why? Because we should expect the Fed funds rate to decline from the peak at 5% in June toward the equilibrium interest rate which keeps the economy at full employment and inflation at 2%. The Fed estimates that this so-called r-star is around 2.5%, see also the Fed’s latest dot plot. The implication for investors is that the level of the risk-free rate is resetting higher than where it was before the pandemic, see chart below. And this permanent increase in the costs of capital has a wide range of consequences for corporate America and financial markets, including how to think about credit spreads and stock prices, in particular tech and growth.
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