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Diverging expectations

Expectations for US official rates are diverging significantly between the #federalreserve and the market, through fed funds futures. At this point, for 2023 year end, the fed funds futures expect rates to be lower than today and 100 bps lower than the fed estimate for the same period. In other words, the market expects the fed to pívot into a dovish view with the assumption that inflation has peaked and further tightening may hurt the economy and push it into a recession. We don’t know yet who is right, but both espectations need to meet at one point: If the fed folds, the markets should rally, signaling the end of this tightening cycle, but if the market folds and adjusts to fed expectations, there should be additional pain for investors.

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Source: Bloomberg

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