Why the Fed May Have to Hike Far Higher Than Expected | Henry Peabody on the Fed’s Triple Mandate and Uneven Transmission of Monetary Policy

The Federal Reserve’s unofficial "third mandate"—the transmission of credit across the economy—has created a bifurcated financial landscape where access to capital is sharply divided. While high-quality corporations and AI-linked sectors enjoy relatively easy credit, consumers and lower-quality borrowers face restrictive conditions, evidenced by rising mortgage and auto loan rates. This divergence stems from a shift toward a non-banked financial system, which weakens traditional policy transmission mechanisms and necessitates higher, longer-duration interest rates to effectively curb demand. Henry Peabody, Senior Investment Strategist at GMO, highlights that the lack of transparency in private credit markets obscures the true state of the credit cycle, increasing the risk of policy errors. Consequently, investors should prioritize uncorrelated assets and defensive positioning, as the historical reliability of duration to hedge against risk becomes increasingly unstable in this high-inflation, high-cost capital regime.