3 May 2024

'Higher for Longer' — The Fed Fund Future Market Takes Heed!

The market has notably adjusted its expectations for the Federal Reserve's monetary policy over the coming years. Initially, an aggressive trajectory toward a terminal rate of around 3% was projected at the start of the year, indicating a return to a Neutral rate adjusted for inflation. However, current forecasts now suggest a more cautious normalization, with a significantly higher terminal rate of 4%. Intriguingly, the market anticipates further tightening by mid-2026, which some analysts believe could echo the inflation resurgence patterns of the 1970s. The Neutral rate (R*), long considered to be around 0.5%, is now hotly debated and estimated to be between 1.5% and 2.0% in the United States. The Fed Funds Futures market appears to have already factored in the impacts of enduring fiscal deficits, improved productivity, and deglobalization trends. How will these elements continue to influence Fed policy amid shifting global economic dynamics? Source: Bloomberg


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