U.S. Fed Funds Target Rate While “panic rate cuts” have historically been associated with negative market outcomes, the current context suggests that Wall Street may be embracing these cuts as necessary adjustments rather than signs of economic distress. Image: BofA Global Investment Strategy
Implied Fed Funds Target Rate The dot plot shows a median projection for the federal funds rate to decrease to 4.38% by the end of 2024 and further down to 3.38% by the end of 2025, signaling a shift towards a more accommodative monetary policy. Image: Bloomberg
Fed Funds Rate and Fed Funds Futures Deutsche Bank’s forecast for the federal funds rate is significantly more hawkish than many mainstream projections, anticipating modest reductions in 2025. Image: Deutsche Bank
2-Year U.S. Treasury Yield – Fed Funds Rate The current spread between the 2-year U.S. Treasury yield and the federal funds rate suggests that the bond market perceives the Federal Reserve’s monetary policy as tight. Image: Morgan Stanley Wealth Management
Fed Funds vs. 2-Year U.S. Treasury Yield (Leading Indicator) The current 2-year U.S. Treasury yield, which is below the federal funds rate, indicates that the Fed’s monetary policy is restrictive. Furthermore, the 2-year yield typically leads the fed funds rate by about 20 weeks. Image: Morgan Stanley Research
Federal Funds Rate By aligning market expectations with its policy intentions, the Fed minimizes surprises in the fed funds rate relative to market pricing at the start of the blackout period, thereby reducing the likelihood of market disruptions. Image: Deutsche Bank
Fed Funds Forecast vs. Market Pricing While the Fed has made progress in the fight against inflation, BofA holds a significantly more hawkish view on Fed policy compared to market expectations. Image: BofA Global Research
Current Market Pricing for Fed Funds Rate Traders predict that the Federal Reserve’s terminal rate, which marks the end of the rate cut cycle, will be around 3%. Image: BofA Global Investment Strategy
Flows into Equity and Bonds Funds Substantial inflows into equity and bond funds are fueled by investor optimism regarding falling inflation and the potential for interest rate cuts by the Fed. Image: Deutsche Bank Asset Allocation
All Money Market Funds Total Net Assets Investors currently hold $6.22 trillion in money market funds, a figure that is being interpreted as contrarian bullish for the stock market. Image: BofA Global Research
U.S. Federal Funds Effective Rate Less CPI To combat inflation, the Fed has raised interest rates aggressively to their highest level in years, resulting in the real federal funds rate reaching a post-GFC high. Image: Deutsche Bank Research