Traders’ expectations for where the Federal Reserve’s benchmark interest rate will wind up in late 2024 is well above where they saw it heading soon after the collapse of some U.S. regional banks earlier this year, even as they anticipate rate cuts next year.
Federal-funds-futures contracts for December 2024 are now “a long way above” the level seen in the wake of the sudden failure of Silicon Valley Bank earlier this year, said Jim Reid, a strategist at Deutsche Bank Research, in a note emailed Wednesday. They were at 2.695% in early May, shortly after First Republic Bank failed, he said, amid heightened fears over stress in the U.S. regional-banking sector.
The move higher since May could be interpreted as good news by some investors.
“This is good news in so far as it reflects growing confidence in a soft landing, since if there is a near-term recession, it’s hard to imagine a scenario where the Fed only cuts just under 3 times by the end of 2024,” said Reid. “However, it could still be bad news if you feel that the longer we have such high rates, the more likely there is to be an accident.”
The Fed has rapidly raised rates in the past 18 months to cool inflation in the U.S., aiming to slow the economy through tighter monetary policy without causing a recession. While traders in the fed-funds-futures market expect the central bank will on Wednesday announce that it’s holding its benchmark rate steady at the current 22-year high of 5.25% to 5.5%, their expectations for the future path of monetary policy are less certain, according to the CME FedWatch Tool.
“The ideal scenario for the soft landing case would be a Fed that’s able to cut more aggressively” than implied in the chart above, as a result of “inflation being under perfect control and the economy chugging along,” said Reid. “In this scenario, yields would fall across the board and the economy could refinance at notably lower rates than are available now before much damage is done or any more accidents occur.”
Ahead of the Fed’s statement on Wednesday, fed-futures indicated that most traders saw the Fed’s benchmark rate landing somewhere in the range of 4.25% to 5% in December 2024, according to the CME FedWatch Tool, at last check.
Read: BlackRock’s Rick Rieder eyes potential Fed ‘split’ on whether to do more rate hikes in 2023
Meanwhile, U.S. stocks were mostly higher in early afternoon trading on Wednesday, as Treasury yields fell ahead of the Fed’s policy statement, expected at 2 p.m. Eastern Time. The Dow Jones Industrial Average
DJIA
was up 0.7%, while the S&P 500
SPX
rose 0.2% and the Nasdaq Composite
COMP
fell 0.1%, according to FactSet data, at last check.
In the bond market, the yield on the 10-year Treasury note
BX:TMUBMUSD10Y
was trading about five basis points lower at around 4.32% in early afternoon trading Wednesday, while two-year Treasury yields
BX:TMUBMUSD02Y
dropped seven basis points to around 5.04%.
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