Live Markets-The end of immaculate disinflation?

Main US equity indexes green; Nasdaq out front, up >1.5%

Comm Services lead S&P sector gainers; Energy weakest group

Europe's STOXX gains >1%

Dollar gains; bitcoin rallies ~6%; gold dips; US crude down >4.5%

US 10-year Treasury yield falls to ~4.96%

According to Brian Nick, managing director and head of portfolio strategy at NewEdge Wealth, the Fed's latest rate hike was expected. The bigger question is whether a modest tightening cycle can lower inflation without causing meaningful economic damage.

In a note out late last week, Nick argues that progress on inflation has stalled and, in some areas, reversed due to factors such as tariffs, energy costs and geopolitics that are largely beyond the Fed's control. While markets expect only limited additional rate hikes, he is skeptical that such a mild response will be enough to return inflation to the Fed's 2% target.

The bullish case is what Nick calls "immaculate disinflation," where inflation cools without a recession or a significant rise in unemployment. But he believes the forces that helped deliver that outcome in recent years are fading. Labor-force growth has slowed, housing supply remains constrained, household finances are becoming more strained, and energy prices remain a potential source of inflation pressure.

As a result, Nick sees a difficult trade-off ahead. Either higher rates will weigh more heavily on growth than they did in the last cycle, or inflation will remain stuck above target, likely in the 3% to 3.5% range. He doubts the Fed is willing to slow the economy enough to quickly crush inflation.

Even so, Nick remains constructive on markets and particularly on bonds. With yields significantly higher, he believes investors are finally being well compensated for interest-rate risk. His takeaway: investors may want to revisit their asset allocations and consider adding fixed income exposure.