Investors seem to think the Federal Reserve will move interest rates lower this year. Often, however, investor predictions on rates miss their mark. As the chart below shows, investor expectations for 10-year Treasury yields (which relate directly to rates) tend to either over-or-underestimate such movements. Following the 2008 financial crisis, investors spent almost ten years incorrectly assuming that rates would recede to pre-2008 levels. More recently, investors failed to see that the Fed would move rates to around 5%.
For investors, futures markets serve as a leading indicator for rate movements. They currently reflect a rate cute of more than 1% in 2024. The Fed, however, predicts a much lower number. Moreover, a surprisingly strong economy is countering murmurs within the futures space. A booming labor market and wage growth are sustaining consumer spending, which in turn is sustaining inflation. Sustained inflation reduces the need for a rate cut, which would only encourage more spending.
A 2024 without rate cuts, however, could be problematic for investors. It could disrupt recent runs in the bond and (potentially) stock markets. A “higher for longer” scenario has the potential to curtail recent movement towards lower bond yields and lower borrowing costs. A yield reversal could drag stocks lower, as it did in 2022. But the ultimate impact is unclear.
Investors play a betting a game, and their expectations help place those bets. Their predictions do not mitigate the vast uncertainties of financial markets.
Source: Eric Wallerstein, WSJ
Reade Ben is a policy analyst at the Manhattan Institute.
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