Traders Aren't Buying the Fed's 'Higher-For-Longer' Vision

• It's a now-familiar dance: Federal Reserve officials signal to the world that interest rates are not dropping anytime soon. Financial markets respond with bets to the contrary. That dynamic, which has played out repeatedly over the course of a U.S. central bank policy tightening regime that began 18 months ago, was back on full display last week.
• Forecasts published on Wednesday by the U.S. central bank showed that a majority of its policymakers see the Fed's benchmark overnight interest rate ending this year at 5.6%, which implies one more interest rate hike in the next three months. They also now anticipate an end-of-2024 policy rate of at least 5.1%, half a percentage point higher than they projected three months ago.
• Meanwhile, interest rate futures contracts continue to price in only about a 50% chance of further tightening in 2023, and see a 4.65% policy rate by the end of next year. Also, that disagreement over the policy trajectory, while not unusual, could complicate the Fed's efforts to smother inflation, if easier financial conditions spur spending or investment that rekindles price pressures.
• Inflation by the Fed's preferred measure, the personal consumption expenditures price index, peaked in the summer of 2022 at 7% and had fallen to 3.3% this past July. With non-housing services inflation still sticky, Fed officials project underlying inflation pressures will ease only slowly from here.
• Financial markets may be more optimistic about easing price pressures than the more guarded Fed policymakers. "We continue to expect a faster pace of fed funds rate cuts than what the Fed currently projects, as we're anticipating a faster pace of inflation reduction," said Preston Caldwell, chief U.S. economist at Morningstar, predicting core PCE inflation will drop to 1.9% by the end of next year. Fed policymakers see end-of-2024 core inflation at 2.6%.

(Source: Reuters)