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The recent surge in US inflation has ‘made a mockery of’ interest rate projections, market-implied and professional forecasts alike, according to Moody’s Investors Service, which recently said the steady release of bad inflation data has eroded faith in the US Federal Reserve’s mantra that inflation pressures from supply-chain and energy-supply shocks were temporary.
By March, inflationary forces had forced the Fed to flip from a dovish to a hawkish stance, Moody’s noted.
The surge in US inflation has ‘made a mockery of’ interest rate projections, market-implied and professional forecasts alike, according to Moody’s Investors Service, which has said the steady release of bad inflation data has eroded faith in the US Federal Reserve’s mantra that inflation pressures from supply-chain and energy-supply shocks were temporary.
A striking feature of the current environment is the rollercoaster shaped path of the futures-implied Fed funds rate as of early July. The market implied path for the Fed funds rate has it rising rapidly, exceeding 3.6 per cent in March 2023, then sharply reversing to around 2.7 per cent at the end of 2024, it said.
Market participants expect the Fed will get inflation under control in a bit more than a year and within a few years return interest rates to their neutral rate, which both Moody’s and the Fed estimate to be around 2.5 per cent.
The market projects a decline in the funds rate to about 2.7 per cent at the end of 2024, which is lower than the Federal Open Market Committee (FOMC) central tendency projection of 3.4 per cent, Moody’s said.
The futures are likely pricing in the perception that the coming tightening has good odds of tipping the economy into recession, which would be accompanied by the Fed slashing the federal funds rate back to near zero.
Recession risks currently appear more salient than the risk of runaway inflation, Moody’s added.
Fibre2Fashion News Desk (DS)
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