Chart of the week

Could investors be counting on an unrequited Fed pivot?

Investors have bet on a Fed pivot recently. Yet, this week’s chart looks at market-based expectations for the Fed funds rate, which have kept rising.

October 28, 2022 | 2 minute read

Market-based Fed rate expectations continue to rise

Source: Bloomberg Finance, L.P., as of October 27, 2022.

  • Markets have rallied over the past two weeks with stocks rising more than 6% while yields have stalled following their steep climb for much of this year.1
  • While GDP data released this week strengthened the case the inflationary pressures have already cooled, recent history may serve as a caution sign. As the chart shows, investors have notably been caught flatfooted several times this year, as they attempted to front run a dovish Fed pivot that never materialized.
  • In fact, market expectations for the Fed funds rate have increased sharply over the past four months. Since June 30, the Fed’s terminal (or peak) rate has risen by almost 1.35%, as investors currently expect the Fed funds rate to reach nearly 5.0% in May 2023, before policymakers gradually back off.1
  • Markets are forward-looking and investor expectations surrounding a Fed pivot could prove prescient. Yet, recent history has shown the potential dangers of relying on a Fed pivot before inflation has shown evidence of moving consistently lower. This is particularly true today, as multiple drivers of potential volatility remain in place: Another disappointing CPI report, further earnings or geopolitical deterioration, to name a few.
  • Against this backdrop, investors would be wise remaining prepared for further volatility until policymakers see further evidence the inflation dragon (particularly in services) has been slayed.

  • Bloomberg Finance, L.P., as of October 27, 2022. Stocks refer to the S&P 500 Index.

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