When the 10-year US Treasury yield hit its intraday peak of 4.34% in October 2022, the markets essentially cast their vote: rates have gone far enough and it is just a matter of time until the Fed pivots from hikes to cuts, Singh and Tipp add. “Current market pricing shows more than 200 bps of rate cuts by the second half of 2024 as a mean expectation,” they estimate.
Unsurprisingly the US Federal Reserve raised its Federal Funds Rate by 25 bps to 5.25% on May 3, hinting that this could be the last rate hike for a while. During the press conference, Fed Chair Jerome Powell said that future moves would be “data dependent”. Key to the less hawkish tone is the lagged and ongoing effect of tighter credit conditions, which are accelerating after the recent shocks to the banking sector.
“Despite the non-committal guidance offered today, we think this will be the last rate hike of the cycle — particularly since the debt-ceiling impasse may have reached a crisis point by the time of the June meeting. Looking ahead, we expect the Fed will cut the policy rate by 75 bps starting in 4Q2023 once the labour market confirms that the economy has softened markedly and that inflation pressure is receding towards the Fed’s target,” write PGIM Fixed Income’s Daleep Singh, chief global economist, head of global macroeconomic research, and Robert Tipp, chief investment strategist, head of global bonds.
