Fed funds futures curve

The market pricing shows that the timeline for any rate cuts is roughly around June to July next year. And as mentioned here yesterday, it is not that much different from two months ago. So, what does that tell us?

Essentially, it means that traders are still roughly convinced by the idea that the Fed will be able to stick with the higher rates for longer narrative. But not for too long that is. At some point this year, there were certain quarters of the market convinced that the Fed might have to cut rates as early as Q1 next year. Now, that is quite a distant possibility or dare I say a near improbability.

If the economy holds up and/or if inflationary pressures continue to prove to be stickier than expected, there is still an outside chance of the Fed even making a U-turn and tightening further. Now, that will throw a wrench in the works of those expecting the cycle to be done and dusted already. And based on the curve above, that is the assumption right now i.e. no more rate hikes.

It is one predicated on the story that inflation will eventually keep following the downwards path towards 2% eventually. But therein lies the risk to traders of getting caught wrongfooted. It's all about the data right now and we'll see if the latest one today will corroborate with the market's idea or if there is a need to potentially rethink.