Interest Rate Forecasts

Recent data releases give the green light to a September interest-rate cut from the US Federal Reserve, in my view, and the latest job market report was the likely clincher. While inflation is not yet back to target, it remains within striking range, and the Fed is likely to take comfort from signs of cooling of wage growth.   As could be expected at such a meaningful turning point, a number of investors and analysts are rushing to anticipate a sharp policy correction. However, I don’t think these predictions are justified by the current economic outlook. The unemployment rate continues to point to a rather healthy labor market, consumer spending is holding up well, and fiscal policy remains exceptionally loose and seems unlikely to tighten any time soon.   I therefore remain of the view that we will see a gradual easing of policy with rate cuts totaling somewhere around 125-150 basis points, leaving the fed funds rate at or above 4%. Over the longer term, I see real short-term rates closer to their long-term 2% average than the near-zero level of the recent past. #fixedincome #investmentstrategy #interestrates #fed #inflation #monetarypolicy

The most important news coming out of the Fed tomorrow won't be the decision to lower short-term rates - everyone is already expecting that. The bigger news will be the release of the new Fed dot plot. Four times a year, the Fed publishes its Summary of Economic Projections, which includes an anonymous chart showing where each of the 19 FOMC participants believes the federal funds rate will be at the end of the year, the next few years, and over the longer run. The chart below compares the June dot plot with the current 1-month Term SOFR curve, highlighting the gap between what the Fed projected in June and what the market is pricing today. For example, the Fed's median estimate for the end of 2026 was 3.625%, while the market is now projecting 2.89%. Tomorrow’s dot plot will reveal how many rate cuts Fed officials anticipate, which will directly influence SOFR, Treasury yields, and broader markets.

JAY POWELL, JOBS AND THE EXPRESS LANE TO A NEUTRAL INTEREST RATE In my latest piece for StoneX Group Inc. with market strategist Kathryn Rooney Vera, I explain why I think the Federal Reserve will move its benchmark interest rate down at a faster pace than planned a few weeks ago. The labor market is paramount, as Fed Chairman Jerome Powell made clear in his Jackson Hole speech last week. I say in the StoneX Group Inc. piece: "The Fed’s goal over the next couple of years is to get the target interest rate back down to something closer to neutral. As Powell has observed, the neutral interest rate is not a fixed or known number, it can only be theorized. Many Fed officials believe it is below 3%, in part based on the recent history of low rates in the post-2008 era. We at StoneX believe it is higher. Whether you think it is 2.9% or 3.5%, almost everyone agrees a neutral rate is much lower than the present rate of 5.33%. That’s what Powell means when he says he has ample room to respond. The Fed is heading toward 3.0% to 3.5% between now and 2026, about two percentage points of cuts. "The big question is how fast it will get there. Powell has now clearly stated the pace of rate cuts will depend importantly on whether the job market cools further. (If inflation re-accelerates, or decelerates faster than expected, that will obviously also dictate the cadence of rate changes.) If the jobless rate rises further, the Fed will move to get to neutral in a hurry. If recession alarms go off – which they haven’t done yet – the Fed might even aim to move below its estimate of a neutral rate, into the 2% range. "At midyear in their Summary of Economic Projections, Fed officials estimated they would get to a neutral rate in 2026. We believe they are now on a path to get there during the second half of 2025 and possibly sooner. The Fed’s updated projections in September will likely indicate as much."

We’ve updated our #rate forecasts post-election, based on three main assumptions: 1) The #Fed will continue cutting rates, but may proceed more cautiously and maintain some optionality along the way; 2) The economy will continue to grow around trend near term; 3) A Republican sweep raises the prospects of fiscal expansion, which increases growth and inflation expectations. We still believe the direction of travel for interest rates is lower as any policy changes will likely take time to be finalized and implemented, the labor market continues to loosen, and the terminal rate has already repriced higher. But we now see the 10-year US Treasury yield trending towards 4% by June 2025, up from our previous forecast of 3.5%. Read more below.

Where will Australian interest rates settle? Here are some key points: - Australia has been a relative laggard in the rate cutting process, compared to our global peers, because core inflation took longer to decline in Australia through 2024. - But, interest rates are likely to fall further this year and the growth threat from tariffs increases the need for rate cuts. We expect the cash rate to decline to 3.6% by the end of this year and to end the cutting cycle at 3.1%. This is higher than average interest rates in the decade prior to Covid. - But the large falls in global sharemarkets from US tariffs and the potential hit to global growth means that larger and faster rate cuts could occur in coming months and a 50 basis point rate cut can’t be ruled out at the May meeting.

Fed Cuts & Mortgage Rate Forecast for 2025 Question: Do you think mortgage rates will go down in 2025, around how much, and why? Answer: Yes, I expect 30-year conventional mortgage rates to go down to between 5.75% - 6.00% in 2025. With the July jobs report coming out at 4.3% unemployment, triggering the Sahm rule, I think a recession in 2025 is likely. We are not there yet, but unemployment will continue to rise, and few are discussing the gray rhino of commercial real estate losses, which is expected to peak in 2026. (For more on commercial real estate losses, follow Dave Wald, JAKE SHARP, and Michele Wucker). However, the 10-year Treasury rate + 2.25% is likely a solid base, and I do not expect rates to decline below 5.5% in 2025. Powell’s archenemy has been inflation, but he will have to cut the Fed funds rates. How many cuts and for how much? I’d be conservative, as inflation may creep upward next year. I’d estimate 1.25% – 1.5% by the end of 2025, which would leave the Fed funds rate between 3.75%-4.00% by the end of 2025. Andrea Lisi, CFA agrees with 3.75% - 4.00% if we can steer clear of a recession. https://lnkd.in/eYeapJKY This seems reasonable as the Fed’s dot plot from July shows that half of them think about 4.00-4.25%. https://lnkd.in/gWtmiMuf Haven’t we learned by now to stop fighting the Fed, and that Powell doesn’t like to cut? To me, this seems in line with a mild recession. The 10-year Treasury note was 3.84% this morning. As you can see, when the 10-yr minus the federal funds rate is negative and comes back up to 0, there is generally a recession. https://lnkd.in/etE5VNk9 As for mortgage rates? I did some analysis on this in October 2023, and I’m still satisfied with my findings. https://lnkd.in/gDzubx9U The average spread between the 10-yr Treasury rate and the average mortgage rate is known to be about 170-175 bps. However, the Fed not buying Treasuries still increases the spread by 50 bps. So 225 – 250 bps. (3.75% - 4.00%) + (2.25% - 2.5%) = 6.00% – 6.50% But I know what you’re thinking… That’s close where we are now. Surely rates are going to go down, right? So… what if there is no recession, or what if the 10-yr stays at least 50-75 bps less than the Fed funds rate. In that case… (3.25% – 3.5%) + 2.25% = 5.5% - 5.75% All things considered, I can see mortgage rates on conventional mortgages getting in the mid to high 5s in 2025, but not lower. Say 5.75% - 6% by late 2025.

Do’s & Dots The Federal Reserve concludes its two-day meeting today, with markets virtually certain that rates will remain unchanged in the 4.25% - 4.50% range—marking the seventh consecutive month at this level. While the rate decision itself holds no surprises, traders are positioning for nuance. Bloomberg reports that savvy investors have taken long positions, anticipating Chair Powell will adopt a more dovish tone that signals future rate cuts. The real risk lies in the updated dot plot projections. A hawkish shift showing fewer anticipated cuts would likely disappoint both Fed watchers and markets, potentially triggering volatility despite the expected rate hold. Economic fundamentals suggest the Fed will eventually ease policy as growth moderates in the second half of 2025, down from the current 2% pace. The recession narrative has largely faded, with even previously bearish economists revising their outlooks upward. This shift reflects underlying economic resilience that has surprised many forecasters throughout the cycle. For the latter half of 2025, expect GDP growth to decelerate to a more sustainable 1% - 1.5% range—a pace that should provide the Fed with sufficient justification to begin cutting rates without signaling economic distress. When the Fed does resume its easing path, I expect: - Treasury rates to decline approximately 50 basis points over that year, with short-term yields leading the decline as the market prices in policy normalization. - Refinancing activity to accelerate across high-yield and broadly syndicated loan markets as credit spreads tighten and all-in borrowing costs fall. - Corporate earnings growth to initially slow alongside GDP deceleration, then recover modestly once Fed easing begins to support economic activity. - M&A activity to rebound significantly as companies that have been hoarding cash and preserving liquidity regain confidence to deploy capital. - Capital expenditure to increase meaningfully—a long-overdue development that's critically needed. - Housing market activity to strengthen as lower mortgage rates improve affordability and unlock pent-up demand. - Financial and technology sectors to outperform given their sensitivity to funding costs. - Credit market conditions to improve broadly, driving increased demand for private credit while reducing default risks across industry sectors.

Fixed Income Outlook 2025: What’s Next? The U.S. fixed income market is at a turning point. With 10-year Treasury yields at ~4.5%, three forces will shape the future: Inflation expectations GDP growth Term premiums Nomura’s scenario analysis highlights three possible paths: 1. Recession (10% probability) GDP shrinks (<0%). Inflation falls below 1%. Yields drop to 0-3%. Weak consumer spending and rising layoffs are key drivers. 2. Soft Landing (60% probability) Moderate growth (0-2%). Inflation stays controlled (≤3%). Yields stabilize at 3-4.5%. Resilient consumers and gradual Fed easing support this scenario. 3. Trump 2.0 Reflation (30% probability) GDP grows strongly (>2%). Inflation exceeds 3%. Yields rise to 4.5-6%. Fiscal spending, tariffs, and supply chain disruptions drive inflation higher. What’s Driving Rates? Short-term rates respond to policy actions. Long-term rates depend on growth, inflation, and term premiums. Higher fiscal deficits or geopolitical risks could push term premiums up. How Should Investors Respond? Stay short: Focus on shorter-duration Treasuries for better risk-reward. Be selective: Investment-grade credits are more resilient. Think tactically: Structured products offer yield enhancement and risk management. What’s the Big Picture? Trump 2.0 policies could reshape markets. Tariffs and fiscal expansion may fuel inflation. Portfolio flexibility will be critical in a year full of unknowns. 2025 offers both risks and opportunities. Will you be ready? #FixedIncome #EconomicTrends #InflationOutlook #InvestmentStrategy #TrumpPolicy #RatesForecast

Fed's Rate Conundrum: Pause Now, Cut Later? Markets Bet on the Latter In its July 30-31, 2024, meeting, the US Federal Reserve held the federal funds target rate (FFTR) steady at 5.25%-5.50%, marking the eighth consecutive pause. The decision was anticipated and reflects the Fed’s cautious stance following a cycle of aggressive rate hikes. The Fed also kept the interest rate on reserves (IOER) unchanged at 5.40%. The key update in the Fed’s statement was a shift in focus from solely inflation control to balancing both inflation and employment objectives. Fed Chair Jerome Powell indicated that, if inflation trends align with targets and labor market conditions remain stable, a rate cut could be considered as early as September. Traders now see a 17% chance of a 50 basis point rate cut in September, up from 5% earlier. Markets also expect a total 75 basis point reduction by year-end, with rates potentially dropping to 4.5%-4.75%, assuming continued progress towards the 2% inflation target and no significant deterioration in the labor market. For emerging markets, especially the Indian economy, a dovish Fed stance and potential rate cuts are likely to enhance capital inflows into riskier assets. A softer dollar could support EM currencies and boost capital inflows in India. However, the actual impact will depend on global risk dynamics and domestic economic conditions. Prabhudas Lilladher Private Limited Amisha Vora Siddharth Vora Amnish Aggarwal

We have revised our view to an expectation that the RBA will first start cutting rates at the February 2025 meeting, and end at 3.35%. There are risks on both sides of this forecast. As always, our view on rates is predicated on economic developments turning out broadly in line with our own forecasts. These can differ from the RBA’s view, sometimes materially. Our forecasts for underlying inflation are the same as the RBA’s August forecasts, but we are more pessimistic about consumption growth and less concerned over productivity. Despite the identical inflation outlook, the RBA’s conviction levels around these forecasts are evidently not high enough to consider moving in the short term. Another consideration that is specific to the RBA and to the current juncture is that the RBA Review mandated that the RBA adopt and emphasise analytical tools and approaches that it had previously not emphasised. But these new tools and approaches are new and untested, and it is understandable that, in that situation, the Board would have a higher bar for accumulated evidence before acting. More at Westpac IQ, free for all to read: https://lnkd.in/gpdNAbFf Westpac Institutional Bank