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The Federal Reserve FOMC members have consistently stated that there will be no rate cuts in 2023. Rather, they are suggesting at least one more 25 basis point rate increase to a target range of 5.00% to 5.25%. Fed funds futures contracts confirm market expectations of a 25% increase this quarter. However, contrary to the Federal Reserve’s communication, Fed funds futures data suggests multiple rate cuts coming later this year beginning in July with rates declining to approximately 4.3% by year end.
Accurately predicting the federal funds rate at year end would give managers a significant advantage to outperform, because the Fed funds rate will have major implications for the stock and bond markets, the inflation rate, the stability of our banking system, and growth of the US economy.
To explore the disconnect between the Fed’s communication and market expectations based on the Fed funds futures market, Agecroft Partners conducted a survey of institutional investors between April 6th – 12th. 3,315 votes were cast with approximately 75% coming from individuals associated with the CFA Institute, through both Members and CFA Program Candidates LinkedIn groups. These groups represent a broadly diversified perspective on the capital markets. The remaining 25% of respondents were divided between professionals associated with the alternative investment industry and the financial advisory industry. The results are posted below.
The survey results show that 57% of individuals believe that the fed funds rate at year-end will be greater than it is now, while only 21% believe it will be lower. Although a clear consensus cannot be derived, this information provides valuable insight into the current perspective. Even targeting multiple segments of the marketplace, there was a very high consistency of answers. For example, 28% of respondents between both CFA Members and Candidates predicted a 25 basis point hike by year-end while individuals associated with the alternative investment industry and the financial advisory industry similarly had 26% of participants predict the same outcome.
If the majority of our survey participants are correct and rates do end up higher at year-end, we could see downward pressure on stock and bond prices, increased pressure on bank balance sheets, and a continued decrease in lending from community/regional banks. All of these would, in turn, increase the probability of a hard recession, rather than a soft one.
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