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%
[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]
Investing involves risk including loss of principal. The information provided is not directed at any investor or category of investors and is provided solely as general information about products and services or to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither B. Riley Wealth Management, Inc. nor its affiliates are undertaking to provide you with investment advice or recommendations of any kind. Securities and variable insurance products offered through B. Riley Wealth Management, Inc., member FINRA/SIPC. Fee-based advisory services offered through B. Riley Wealth Advisors, Inc., a SEC-registered investment adviser. Past performance does not guarantee future results. The information herein has been obtained from sources believed to be reliable, but we do not guarantee its accuracy or completeness. The views and opinions expressed in this article are those of the author and do not necessarily reflect those of B. Riley Wealth Management, Inc.
[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