Predicting the Fed’s Next Move

Michael LebowitzAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

After hiking rates by 5.25% since March 2022, the Fed is in a wait-and-see period, commonly deemed a “pause.” Since the Fed started hiking rates, inflation has declined meaningfully but remains moderately above the Fed's 2% target. The economy continues to thrive, fueled by a strong labor market.

Despite the good news, a dark cloud lingers on the horizon. The Fed's primary fear is that the lag effect of prior rate hikes has yet to impact the economy fully. It wants a soft landing, implying little economic degradation. But a much stronger downturn can't be ruled out by the Fed or advisors. Given the odd juxtaposition between strong economic growth and recession fears, a Fed pause is the most likely action.

The Fed funds futures market agrees with my assessment. As I show below, it expects the Fed to pause through February. Starting in March 2024, the market implies increasing odds of the Fed cutting rates.

fed funds features