This article shows that the bond futures market is anticipating that inflation will cool quickly and anticipate that rates will peak sooner — next spring — and that the Fed will quickly pivot to easing policy. Traders in these markets expect the Fed to bring its target rate back down to around 3.2% to finish 2023.
The same market predicted a similar track last year – but they were wrong about inflation and rates. Inflation and rates were much higher in 2022 than predicted in 2021.
The latest official survey of Fed policy makers, conducted in June, shows that most project raising rates through 2023 to at least 3.5% to 3.75% or higher, up from the current Fed funds target of 2.25% to 2.5%. Last month Mr. Powell told reporters that those June projections remain a good guide.
Neel Kashkari, who will vote on Fed policy next year, said the target rate might need to reach 4.4% by the end of 2023.
But there could be a recession. The Fed could change its mind.
As the saying goes “Man makes plans and God laughs”
Just when COVID was winding down and the Fed had their monetary duck in a row, the Russo/Ukraine war hit and inflation projections circled clockwise in the northern hemisphere.
Contributing to the derivative variables is China’s growing economic problems exacerbated by their means of responding to the three year old COVID crisis.
Traders in these markets expect the Fed to bring its target rate back down to around 3.2% to finish 2023. Neel Kashkari, who will vote on Fed policy next year, said the target rate might need to reach 4.4% by the end of 2023. Whom do you believe?
As the other posts indicate, the end of 2023 is a long way from today. But, why not, nothing to lose here. I’ll say the Fed funds rate is 3.75% or less (closer to the traders) at the end of 2023.
Why?
The Fed fund rates has been above 4.4% for all of 2 of the past 20 years, during 2006-2007 (https://www.federalreserve.gov/monetarypolicy/openmarket.htm…).
The world is under secular deflation pressure because of technology advances, which is unlikely to stop.
The world’s largest economies are aging (US, China, Japan, Europe) and have negative, slow or slowing GDP growth.
The wealthy are awash in capital, running out of places to put their money, suppressing market yields and funding all matters of capital investment (see technology advances, above).
