Partner, Head of Fixed Income
Despite all the hoopla and volatility around Powell’s Jackson Hole speech on August 22, the market’s expectation for the path of the fed funds rate has been little changed since the end of last quarter.
For the balance of this year, the fed funds futures market has priced in three 0.25% cuts for the next three FOMC meetings.
However, there has been a significant shift in the market’s expectations since the beginning of the year when markets were looking for a relatively stable path for the policy rate through 2026 and into 2027.
Since then, there has been a steady move lower in forward expectations for the rate through 2026 and 2027. As of August 29, the fed funds futures market is anticipating a 2.90% rate for the January 27, 2027 meeting. That’s a change of 0.83% lower than December’s forecast, quite a difference.
While longer-term expectations have lowered, near-term expectations, specifically for the September and October meetings, have risen. This reflects the increased probability of higher near-term inflation and lower concern around longer-term inflation, and potentially a growing concern around slowing economic growth. If the market was expecting higher future inflation, then the rates forecast would be flat to higher in future meetings.
The market is telling us that the concerns around higher inflation will be short-lived, and the Fed will be embarking on a longer-term decline in the fed funds policy rates. We agree and “don’t fight the Fed.”
