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In the third quarter one of the major props for financial markets was the change in interest rate expectations in the US. The chart below shows the financial markets forecast for the Fed Funds Rate (US policy interest rate) one year from now. As you can see, this fell dramatically from 4.5% to as low as 2.5% in less than three months. This was driven by the bigger than expected cut (0.5%) at the last FOMC (interest rate setting committee of the Federal Reserve) meeting and Chair Powell’s pivot to focusing more on the growth outlook for the US economy than on inflation.
The problem with this thinking is that if the growth data starts to improve then your optimistic outlook for interest rates comes under threat. That is exactly what has happened over the last few weeks. As you can see that interest rate expectation has jumped by 1% from the lows. Here in Goodbody, we welcome this. We did not think that the current growth outlook for the US economy justified the rate of interest cuts implied by the chart. We are somewhat relieved to see the interest rate outlook move into ‘saner’ territory.