A recent survey conducted by Strategas reveals a significant shift in investor expectations regarding the Federal Reserve’s interest rate policy.
According to the survey, “clients 1721909148 fully pricing in [a] September rate cut” following improved inflation data and signs of weakness in rate-sensitive sectors.
In July, the consensus among clients moved towards an earlier start of the easing cycle. “The 3 months forward mean fell 15 bps to 519 bps,” indicating that investors are now anticipating a September rate cut.
Additionally, “the 6 months mean dropped by about 20 bps to 487 bps,” reinforcing the expectation of at least two rate cuts this year, with some investors even predicting a third cut or a cut in January.
While the conditions for rate cuts are becoming apparent, concerns about sticky inflation persist. Factors such as structural rigidity in the labor market and a constrained housing supply are potential drivers of persistent inflation.
Despite expectations of inflation moderating to a two-handle in the coming months, Strategas notes that they “still find ourselves in the sticky inflation and rates camp.”
The survey also highlights that investor expectations for long-term interest rates have increased, with “clients adding about 25 bps to their 24 and 36-month forward expectations,” suggesting that while cuts are expected in the short term, there is an anticipation of higher rates in the longer term due to underlying inflationary pressures.
The survey further notes that “standard deviations were almost unchanged through the 12 months forward bucket,” indicating a narrowing range of short-term outcomes.
However, long-term expectations have widened, reflecting greater uncertainty, says Strategas. Skewness in the survey results remains negative, pointing to downside risks in rates despite an overall increase in longer-term rate expectations.
Overall, Strategas’ clients foresee at least two rate cuts in 2024 but believe that “rates will need to remain higher in the long run.”
