Jerome Powell’s speech at Jackson Hole this past week was the key event the market was watching. His statement that additional rate hikes are still on the table and more work was needed to bring inflation back down towards the Fed’s 2% target was perhaps disappointing to some investors, but not exactly surprising. The market’s reaction on Friday showed investors took the hawkish tone largely in stride with long-term Treasuries actually moving modestly higher on the day.
The biggest development is that the Fed Funds futures market is now pricing in a better than 50/50 chance of another rate hike before the end of the year with the first real chance at a rate cut coming in either May or June. Given the Fed’s repeated insistence that it will do whatever’s necessary to get inflation back down to 2%, even if it causes some pain in the process, that expectation might prove to be a little premature. The higher for longer theme on rates is firmly in place and will likely remain there for at least another 2-3 quarters.
