Wall Street is always searching for a hero to embrace or a villain to blame. And right now, Fed Chair Jerome Powell is the villain. After the September Fed meeting, Powell said interest rates may be heading higher for longer than anticipated and that “no one knows whether this process will lead to a recession, or if so, how significant that recession will be.” The Fed is committed to taming inflation and after earlier in the year hoping they could get there with limited economic fallout, Powell has come to a realization that it will “bring pain to households and businesses.”
But a closer look at fed funds rate expectations suggests the Fed may soon stop raising its benchmark rate.
In the chart below, we see that traders expect short-term rates to peak next year and perhaps trend lower by the end of 2023, which could mean that Wall Street is prepared to see its “villain” as a “hero” with the Fed easing inflation.
We know this year has had its ups and downs. Just when the market appears to have turned a corner, there has been more negative inflation news, and the market is under pressure again. But the Fed has a plan to fight inflation, and investors currently believe that the Fed will have good news to share in that fight next year.