The financial markets have been expecting more cuts in the federal funds rate than Eric and I have all year so far. At the start of this year, the markets anticipated six to seven rate cuts in 2024.The markets are more dovish on the rate outlook than we were because of investors’ widespread belief that the Fed would have to lower interest rates several times to avert a recession, following the historical script.
Six and nine 25bps cuts in the FFR are expected over the next six and 12 months. Those expectations suggest that the FFR will fall 150bps to 3.75% in six months and 225bps to 3.00% in 12 months. Of course, those expectations were heightened by Fed Chair Jerome Powell’s Jackson Hole speech on August 23, when he said: “The time has come for policy to adjust.
September’s SEP might show two or three rate cuts. It will be interesting to see whether and by how much FOMC participants lower their FFR projections for 2025 and 2026. Again, we doubt they will be as dovish as the market’s current projections. In addition, we won’t be surprised if they slightly raise their assessment of the long-run FFR given the resilience of the economy.
As for inflation, we will worry about it much more if either the Democrats or the Republicans sweep the November 5 elections.Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events.