Global Markets Overview is published and updated every month. This includes what has happened in markets, our macroeconomic outlook and price updates on assets such as government bonds, credit and equities.
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What happens to U.S. interest rates and bond yields is critical for assets everywhere. During December, an important shift occurred in U.S. policy makers’ expectations for interest rates, which is relevant to all investors’ portfolios.
In the U.S., monetary policy is set by the Federal Reserve Open Market Committee (FOMC). The chart plots each voting member’s view of the appropriate policy rate at the end of the calendar year shown, and over the “long run”, for the September and December releases. The median or the middle projection is a closely followed statistic and is representative of the FOMC’s collective view, which is highlighted in red. The implications of the most recent release are (numbers correspond to annotations on the chart):
- As widely expected, the FOMC chose to cut policy rates by 25bps in December, to a target range of 4.25 – 4.5%. All else equal, this would be a stimulative move, adding support to U.S. growth and asset prices.
- However, the FOMC also increased its expectation for future interest rates by around 50bps this year and next. The median voting member now expects to cut interest rates less in 2025 and 2026 than they did in September, which tends to act as a headwind (relative to September guidance) on growth and asset prices. In other words, while the Fed cut rates, the cut was dominated by a hawkish (upward) shift in future guidance for interest rates. This outcome was a critical driver of global bond yields and equity markets over December and into January.
- There remains considerable uncertainty over where U.S. interest rates will fall in this cycle. This so-called “terminal rate” is summarised by the FOMC’s longer-run expectations, which continue to exhibit a wide spread. Whilst some members place this rate in the region of 2.5%, implying significant cuts in interest rates from here, others think 3.75% is a more appropriate number. This uncertainty around terminal rates is present in most bond markets and, along with other sources of policy uncertainty, is a key driver of relatively high volatility in rates markets recently, and probably going.
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David is the Global Head of Asset Research at WTW, responsible for economic and capital market research. He also is a member of the Investment Assumptions Committee, who help guide investment policy globally.
