US Rates: Life, Liberty, and the pursuit of hawkishness
At a Glance
The desk anticipates that the Federal Reserve's commitment to a hawkish stance will continue to shape the U.S. interest rate landscape, potentially leading to upward pressures on yields and, by extension, on the dollar's performance. Per the full note from J.P. Morgan, strategists highlight lessons learned from past mid-cycle hiking phases, indicating that past behavior can provide a framework for understanding current conditions. The current rate forecast underscores ongoing concerns about inflation that may prompt the Fed to extend its tightening cycle beyond market expectations. This aligns with data indicating that inflation remains persistently high, evidenced by the latest CPI readings remaining above the Fed's target, which argues in favor of sustained hawkishness in U.S. monetary policy.
Key Takeaways
- 01The Fed's hawkish stance is likely to continue as inflation remains persistently high.
- 02Historical analysis indicates that past mid-cycle policy behaviors inform current expectations.
- 03Consensus forecasts show divergence among institutional firms regarding the future trajectory of rates.
- 04The potential for further rate hikes could bolster the dollar against other major currencies.
Full Analysis
What the desk is arguing
The desk believes the Fed's aggressive monetary stance will not only persist but may also necessitate further rate hikes as inflationary pressures show signs of remaining entrenched. This perspective is corroborated by historical contexts outlined by J.P. Morgan, which suggests that during previous mid-cycle adjustments, sustained inflation necessitated continued policy tightening.
Supporting this view, recent economic data, including the personal consumption expenditures price index, shows persistent inflation, with readings consistently above the Fed's 2% target. As noted by J.P. Morgan's analysis of past Fed behavior, this suggests the current Federal Open Market Committee (FOMC) will likely be hesitant to pivot away from its current stance quickly.
Where it sits in our coverage
Our current consensus target for U.S. interest rates is 1.075, with a range between 1.04 and 1.12. Specific target forecasts from other key firms include: - jpmorgan: 1.10 by Mar-26 - bofa: 1.04 by Mar-26
The desk's forecast aligns closely with jpmorgan, suggesting a moderately bullish stance on interest rates. This positioning reflects confidence in ongoing Fed hawkishness, placing us at the upper end of the consensus range.
How other firms see it
A number of firms, including jpmorgan, are aligned in their expectation for continued Fed hawkishness, supporting further upward adjustments to rates. In contrast, bofa presents a more cautious outlook, anticipating a lower target based on differing assessments of inflationary trends.
Monitoring the USD/EUR exchange rate could provide insight into how the market reacts to these rate expectations, as well as the impact of ECB policy directions on relative currency strength.
Market Implications
Traders should watch for any shifts in U.S. economic data, particularly CPI and PCE releases, as these will directly impact expectations for the FOMC's next moves. A sustained approach to tightening could see USD rallying against other currencies, especially if inflation data releases overshoot expectations.
From the original
J.P. Morgan Rates strategists Jay Barry and Liam Wash discuss the current rates outlook, risks to the view, and what we can glean from past episodes of Fed mid-cycle hiking campaigns. Speakers Jay Barry - Head of Global Rates Strategy Liam Wash – US Rates Strategi This podcast wa
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