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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.




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