The concept of higher-for-longer interest rates in the United States is gaining widespread acceptance among financial markets. This sentiment is being reflected in the trading of the secured overnight financing rate (SOFR).
SOFR Futures Market
According to Gennadiy Goldberg, head of U.S. rates strategy for TD Securities in New York, the market for SOFR futures is currently predicting a decrease of 113 basis points in interest rates by the Federal Reserve in 2024. This is a revised expectation from the previous forecast of 140 basis points before the release of the July consumer price index report on August 10. Moreover, the expected threshold rate, which is the level at which the Fed is likely to halt rate cuts, has risen from 3.3% four weeks ago to 3.8% at present.
Transition from LIBOR to SOFR
SOFR, which stands for secured overnight financing rate, replaced LIBOR (London interbank offered rate) following a scandal over collusion allegations by traders about a decade ago. Traders now rely on SOFR to gauge their expectations for future Fed policies.
Shifting Attention
The focus is shifting from speculating on how high interest rates could rise to when the Federal Reserve will begin implementing rate cuts. Analysts assert that if the first rate cut continues to be postponed, it could have negative implications for stock market performance.
Current Fed Policy Interest-Rate Target Range
Currently, the Federal Reserve’s main policy interest-rate target range is set between 5.25% and 5.5%. It is widely anticipated that this range will remain unchanged during the upcoming meeting of policy makers scheduled for September 19-20. Furthermore, investors are eagerly awaiting insights into Fed Chairman Jerome Powell’s outlook, which will be shared during his speech at the central bank’s annual symposium in Jackson Hole, Wyoming next Friday.
Fed’s Powell Could Join Rather Than Fight Bond Vigilantes as Yields Surge
The recent surge in bond yields has left investors wondering about the Federal Reserve’s next move. According to TD’s Goldberg, the path the Fed takes is more important than the extent of rate hikes. He believes that a prolonged period of high interest rates will weigh on the economy and lower valuations.
Goldberg also suggests that the Fed is unlikely to deliver more rate hikes, as they are concerned about the negative impact on the economy. The focus of policy makers’ discussions will center around whether additional hikes are necessary, given the deceleration of inflation.
Despite the recent selloff in long-dated Treasurys, expectations for the next few Fed meetings remain unchanged. According to the CME FedWatch Tool, there is still a roughly 90% chance of no action by the Fed in September. Traders of fed funds futures also do not anticipate a rate hike in either November or December, despite positive economic data.
However, economists Lindsey Piegza and Lauren Henderson have a different perspective. They believe that a strong U.S. economy will require a stronger policy response to ensure price stability in the long run. They expect a downturn in activity at some point.
In conclusion, the Fed’s approach to bond yields will be closely watched by investors. While some analysts believe that rate hikes are unlikely, others argue that a stronger policy response may be needed to maintain economic stability.
