US Rates: Life, Liberty, and the pursuit of hawkishness
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.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
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.
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.
Risks to this view
The scenario would fundamentally change if inflation data were to dramatically stabilize or show marked decreases, prompting shifts in Fed sentiment. Additionally, geopolitical tensions or economic slowdowns could impact the Fed's capacity to continue its tightening policy, thereby reversing the bullish sentiment on USD.
You're listening to At Any Rate, J.P. Morgan's global research podcast, where we take a look at the story behind some of the biggest trends and themes in fixed income, currency and commodity markets today. I'm your host, Jay Barry, head of global rate strategy at J.P.
Morgan. And today I'm joined by my colleague, Liam Walsh, who is a U.S. rate strategist. So we are recording this podcast on Friday, June 26.
And it's interesting, it's been a relatively quiet week from the data perspective. And after Chair Walsh's hawkish debut at the FOMC meeting last week, yields have declined and we've actually priced in a little bit less Fed tightening. So we think this is a perfect opportunity to take a look at what's happening in U.S. rates markets to see if we can draw any parallels with any other times during the modern monetary policy era.
And I thought no one better to talk about it with me today than Liam. So, Liam, thanks for joining. Yes.
Thanks, Jay, for having me. Jay, before you dig in, what's the latest views on rates markets? I'm glad you asked, Liam.
So I think when we wrote our midyear outlook last week, we made the case that we are currently in an environment where an upward slope to the money market curve makes sense. And that makes sense, particularly in the context of the news that we had out of the FOMC meeting a week and a half ago. Further from that, I would say that when we look at our valuation frameworks, intermediate yields are flagging as too low as well.
Ten year yields in our fair value framework currently appear about 25 to 30 basis points too low, given how the markets are priced for medium term Fed policy growth and inflation expectations and the size of the Fed's balance sheet. And that's a pretty large deviation. It is the largest we've actually seen since just after the wake of the regional banking crisis in the spring of 2023.
So all in, this would tell me alongside what we've talked about, about the justification for an upward slope to the OIS curve, that there is some risks that rates should reverse and move higher over the near term. But I guess the question is, what could be the catalyst? And we do have two big catalysts next week.
The first is that Chair Warsh will appear on a panel at the ECB Cintra conference alongside ECB President Lagarde, Bank of England Governor Bailey and Bank of Canada Governor Macklin. But I do wonder whether the chair will actually say anything new there, particularly because he said very little with respect to the Fed's reaction function or his own views on monetary policy at the meeting a week and a half ago. And there's been little data in the interim to change that.
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