Data Alters Market's Expectations for Peak Policy Rate But Not Outlook for Fed Cuts

Surprisingly strong recent readings for U.S. employment and inflation have been notable for causing markets to rethink the path of U.S. Federal Reserve policy in some ways but not others. Following the latest economic data, the Fed’s terminal policy rate implied by short-dated interest rate forwards increased to about 5.3%, a level expected to be reached in the second quarter of 2023. But markets haven’t much changed the expected path of Fed rate cuts thereafter, still implying a reduction from that peak to roughly 3.65% by the end of 2024.