(Washington)

All eyes on the Fed. Not only is the winding down of the Fed’s balance sheet a potentially major issue to Dollar liquidity and emerging markets, but the market has rate worries to deal with. The big question is how low the US jobless rate can go before it sparks big inflation. Currently sitting at 3.8%, the Fed needs to decide how long it can tolerate the hot market before hiking rates quickly. The US jobless rate has only twice been so low. Once in the 1960s, which led to a decade of high inflation, and once in 2000, which was followed by a recession.

FINSUM: There is currently a big disconnect between the rate rises the market is pricing in versus what the Fed is forecasting. The market may lose that gamble very badly.