United States: markets adjust to “higher for longer” rates

On the occasion of his semi-annual hearing before the two chambers of the American Congress, Jerome Powell held a rather offensive speech on the question of inflation. The Fed could thus again raise its rates by movements of 50 basis points if the data justify it. On the other hand, he confirmed the need to maintain high rates for an extended period and that the final rate of the current cycle could exceed the 5.25% mentioned in the forecasts of last December.

From Fed Funds futures, it is possible to form an opinion on market expectations of the future trajectory of the Fed’s key rates. The graph above shows how investors’ expectations regarding the level of 12-month rates have evolved. Thus, whereas between last October and February, investors were anticipating a final level slightly lower than 5%, they are now anticipating a final rate of 5.5%.

The second curve shows that between November and February, investors began to value a fairly rapid easing of monetary policy, valuing in mid-January the scenario of a peak reached in June slightly below 5%, then of a drop of almost 1.5% over the following year.

The data published since have confirmed the resilience of economic activity and the maintenance of significant inflationary pressures, leading the Fed to tighten its monetary policy further and rate expectations to rise. After the publication of key figures, such as February inflation, the Fed’s meeting on March 22 will no doubt provide a better understanding of how far the central bank will be ready to go.

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The opinion expressed above is dated March 10, 2023 and is subject to change.

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