Fed Easing Cycles: Investors’ Initial Expectations Versus Final Outcomes

06 Sep 2024

At-a-glance

One month prior to Fed easing and tightening cycle, interest rates markets tended to underestimate the amplitude of the moves
On the eve of the past three recessions, investors initially underestimated the scope of rate cuts by 400-625 bps
On the eve of soft landings, expectations built into short term interest rate futures curves were often spot on
As of early September 2024, investors pricing 225-250 bps of rate cuts, more than on the eve of past easing cycles

At its July 31 meeting, the Federal Reserve (Fed) signaled an openness to cutting rates in September, a view reinforced by Fed chair Jerome Powell’s speech in Jackson Hole in August. A subsequent selloff in the equity market triggered by weak US data led fixed-income traders into pricing the Fed easing rates by around 225-250 basis points (bps) over the next two years. (Figure 1). Such expectations can shift quickly. Over the past two years, investor expectations for movement in Fed rates two years ahead have fluctuated from a low of 2.75% to as high as 4.75% (Figure 2).

Figure 1: Fed Funds Futures price 225-250 bps of rate cuts between now and mid-2026

Figure 2: Rate expectations have been choppy over the past two years

Figure 3: In February 2022, investors underestimated the number of rate hikes by 325 bps

The 2019-2020 Easing Cycle

Figure 4: In 2019, investors expected Fed easing and were close to the mark until the pandemic set in

The 2007-2008 Easing Cycle

Figure 5: In 2007, investors priced 100 bps of rate cuts and wound up with 512.5bps of easing

2001-2003 Easing Cycle

Figure 6: In late 2000, investors priced 50 bps of Fed cuts and wound up with 11x as much

The 1998 Easing Cycle

The 1995-1996 Easing Cycle

Figure 7: Rates traders were spot on in pricing the mid-1990s soft landing

The 1989-1992 Easing Cycle

Figure 8: Interest rate markets were blindsided by the 1990-91 recession

Figure 9: Core inflation has been coming down but remains above pre-pandemic norms.

Interest Rate futures and options

Find out more