The federal funds rate will probably stay a lot higher than what officials are projecting

Markets and the Fed now agree about 2024: Futures prices are consistent with officials’ median estimate of 75 basis points of cuts 

Futures indicate that short-term interest rates will bottom out at about 3.75% in 2027

while the median forecast among members of the policy-making Federal Open Market Committee is 2.6% — more than 100 basis points lower.

Market participants expect average inflation to be higher than the Fed’s 2% target.

The market appears to have a higher estimate of the neutral federal funds rate — the level, known as r*

The economy has remained strong even as the Fed has increased its target rate by 525 basis points, suggesting that the current level of 5.25% to 5.50% might not be as restrictive as officials expected.

I’m with the market, largely due to the strength of the economy and the significant easing in financial conditions. 

Taken together, higher average inflation — say, 2.5% — and a neutral rate of 1% to 1.5% would imply a long-term federal funds rate of 3.5% to 4.0%.

Bill Dudley Bloomberg 4 april 2024

Traders started the year predicting up to seven rate cuts. 

Now, many are betting on one or two—or none

The shift could pose a challenge to a stock-market rally built on the hope that the economy would slow enough for the Fed to lower borrowing costs from multidecade highs above 5%, but not enough to start a recession. 

Wall Street Journal 8 April 2024

Desperately Seeking Restrictive

Desperately Seeking Neutral



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