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JBT Wealth Management
A Strategic Partner of B. Riley Wealth

Final Destination for the Fed Funds Rate

March 25, 2024

·        The tightening cycle that began in 2022 and ran through 2023 took the Fed funds rate some 340 basis points above its 5-year average of roughly 1.865%[i]

·        Given this was the most aggressive tightening cycle since the 1980s, it shouldn’t come as a surprise that the last time the Fed funds rate was this far above its 5-year average was under Paul Volcker in 1981[ii]

·        At the beginning of this year, Fed funds futures were pricing in six 25-basis point rate cuts in 2024,[iii] but that has come all the way down to three[iv]

·        Even looking longer term, the current Fed funds dot plot does not go below 2.25%

Blue dots indicate the median projection. Data is based on the economic projections published on December 13, 2023. Red dots indicate the effective rate by the year-end FedFund future price.

[v]

·        This is especially noteworthy because history has shown that the Fed funds rate is cut some 200 basis points below that 5-year average during the ensuing easing cycle,[vi] which would take us back to the zero bound

·        The shock impact of such aggressively higher rates is starting to be felt throughout credit markets. From Q4 2022 to Q4 2023:

o   Mortgage loan debt in serious delinquency went from 0.57% to 0.82%[vii]

o   Auto loan debt in serious delinquency went from 2.22% to 2.66%[viii]

o   Credit card debt in serious delinquency went from 4.01% to 6.36%[ix]

 

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[i] www.fred.stlouisfed.org, “Federal Funds Effective Rate, Annually,” March 15, 2024

[ii] www.fred.stlouisfed.org, “Federal Funds Effective Rate, Annually,” March 15, 2024

[iii] www.cnbc.com, “Two important events this week could determine the future of Fed rate policy,” January 21, 2024

[iv] www.cmegroup.com, “CME FedWatch Tool,” March 15, 2024

[v] www.cmegroup.com, “CME FedWatch Tool,” March 15, 2024

[vi] www.fred.stlouisfed.org, “Federal Funds Effective Rate, Annually,” March 15, 2024

[vii] www.newyorkfed.org, “Credit Card and Auto Loan Delinquencies Continue Rising; Notably Among Younger Borrowers,” February 6, 2024

[viii] www.newyorkfed.org, “Credit Card and Auto Loan Delinquencies Continue Rising; Notably Among Younger Borrowers,” February 6, 2024

[ix] www.newyorkfed.org, “Credit Card and Auto Loan Delinquencies Continue Rising; Notably Among Younger Borrowers,” February 6, 2024

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