Expected Fed funds rate in December 2022
Source: Bloomberg Finance, L.P., as of June 3, 2021.
- As U.S. economic growth has surged in Q2, inflation has quickly become one of investors’ top concerns. The Fed’s Beige Book released this week highlighted the impact increased pricing pressures have had on businesses, noting that many companies anticipate charging higher prices in the coming months.
- Against this backdrop, short-term inflation expectations have jumped this year based on both consumer surveys and market-based measures of inflation.
- Markets, however, seem to be taking these pricing pressures in stride. Longer-term inflation expectations remain relatively subdued, for example, while both the S&P 500 and 10-year U.S. Treasury yield have largely remained flat, trading within tight ranges for much of the past six weeks.
- For their part, Fed speakers have generally treated recent inflation readings as transitory products of a reopening economy, while markets continue to expect short-term rates to remain near the current zero bound for the foreseeable future.1
- The chart shows market-based expectations for the Fed funds rate in December 2022. As it highlights, expectations have edged up modestly since the start of the year but remain below 0.25%.1 Said another way, investors expect that if the Fed takes any action in the next 18 months, it would be limited to about one rate hike.
- A year and a half is a long time in the markets, and conditions could change. At present, however, it appears that the hunt for yield, already an issue for many investors since the Global Financial Crisis, may remain a concern for the foreseeable future.