Federal Reserve Chair Jerome Powell’s testimonies before US lawmakers this week raised the possibility that the central bank's terminal interest rate might be higher than the market (^DJI, ^IXIC, ^GSPC) currently expects, prompting discussions on how bond investors will respond.
Blake Gwinn, Head of US Rates Strategy at RBC Capital Markets, emphasizes on Morning Brief that Powell’s comments went beyond suggesting a higher neutral rate, stating that the Fed should maintain a restrictive stance for now.
"Part of our view, we had essentially been calling for a 4 to 4.25% terminal rate for most of last year, and a big piece of that was that we thought the short-run neutral rate," Gwinn says. "So, maybe not the long-run dots that you see in the Fed's forecasts and things that a lot of these longer-term models would suggest. But, the short-run neutral rate for the economy was actually a lot higher than people were expecting, including the Fed."
Gwinn points out that the bond (^TYX, ^TNX, ^FVX) market is adjusting, with the Fed's outlook now flattening out. This indicates a potential shift toward rate hikes later this year. He also mentions that while tariffs could lead to direct price increases, the Fed would likely overlook them.
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Also catch Blake Gwinn discuss how Fed officials should cautiously approach rate cuts in early 2025.
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This post was written by Josh Lynch