August 2023
Rate Cuts are Still a Long Way Off
August 29, 2023
We are not alone in thinking the Fed is done with rate hikes. The futures market is pricing in a 5.49% federal funds rate for December by year end, lower than the Fed’s 5.63% forecast. And after Fed Chair Jerome Powell’s hawkish speech at Jackson Hole, no one is looking for rate cuts any time soon.
The market doesn’t expect a Fed pivot for another 10 months and believes rates will remain high, near 4.5% by the end of 2024. That’s a big difference from this time last year, when futures were forecasting rates to end 2023 at 3.5%.
What has surprised everyone, including the Fed, is how ineffective rate hikes have been in cooling consumer spending and hiring. Although rate increases have successfully reduced inflation to 3.2% from last year’s peak of 9.1%, they are yet to meaningfully slow consumer spending, and the unemployment rate remains at historic lows. U.S. GDP growth has increased year-to-date, rather than shrunk.
The economy’s resilience has pushed the 10-year Treasury yield over 4%, which contributed to August’s equity volatility. And with Powell’s insistence that nothing more than 2% inflation will suffice, yields could take longer to trend down, despite the Fed being at or near the end of its hiking cycle.
This could mean more pressure on stocks as we move into a seasonally weak September. All eyes will be on this week’s inflation and employment reports for signs that rate hikes are finally cooling the economy – not too much to dim soft landing hopes, but enough to ease the pressure on yields.
This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. The Bank of New York Mellon, DIFC Branch (the “Authorised Firm”) is communicating these materials on behalf of The Bank of New York Mellon. The Bank of New York Mellon is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Authorised Firm is regulated by the Dubai Financial Services Authority and is located at Dubai International Financial Centre, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the Federal Reserve and authorised by the Prudential Regulation Authority. The Bank of New York Mellon London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon is incorporated with limited liability in the State of New York, USA. Head Office: 240 Greenwich Street, New York, NY, 10286, USA. In the U.K. a number of the services associated with BNY Mellon Wealth Management’s Family Office Services– International are provided through The Bank of New York Mellon, London Branch, One Canada Square, London, E14 5AL. The London Branch is registered in England and Wales with FC No. 005522 and BR000818. Investment management services are offered through BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, One Canada Square, London E14 5AL, which is registered in England No. 1118580 and is authorised and regulated by the Financial Conduct Authority. Offshore trust and administration services are through BNY Mellon Trust Company (Cayman) Ltd. This document is issued in the U.K. by The Bank of New York Mellon. In the United States the information provided within this document is for use by professional investors. This material is a financial promotion in the UK and EMEA. This material, and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. BNY Mellon Fund Services (Ireland) Limited is regulated by the Central Bank of Ireland BNY Mellon Investment Servicing (International) Limited is regulated by the Central Bank of Ireland. Trademarks and logos belong to their respective owners. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. ©2023 The Bank of New York Mellon Corporation. All rights reserved. WI-420382-2023-08-29