Fro Deutsche:
We think SPX through 1860.
Right through the 1900s, the Fed is likely to be complacent that this is normal market volatility. Pre-Prom nerves, if you will. It took the SPX just seven trading days to drop from 2102 to 1867 in August, an average of over 30 points a day. It could do the same but the pace would have to be closer to double. Possible but one wouldn’t make that a central forecast. More likely, the debate will quickly shift to how quickly the Fed stops tightening.
It appears, we have discussed previously, that the logic of the median dots is to raise rates to dampen a would be credit bubble (and ‘disable’ the record leverage that low risk premia have allowed). It’s hard to know how far rates have to rise for that outcome but we suspect it’s more than one hike and less than what our adjusted Taylor rule model for terminal funds suggests, which is around 2.5 percent. Plus or minus 1 percent therefore seems a reasonable first proxy, which would have the Fed hiking say through to September, 2016.
Sounds about right.
