![]() This is because for the last 3-4 months, the terminal rate has changed only slightly around the 5% mark, meaning the market has gotten comfortable with this data being priced into the future path of asset prices.Īny deviation, even minor, from this would be trouble, especially if the general context sours, such as if geo-political risk enters the fray (as it has over the weekend with the reports of the drone strikes in Iran). If that were to happen based on the macro data, the market might start to feel like risk is most certainly off once again (stocks fall). In the chart above, you can see where the market is pricing for the peak in US interest rates to be - about 5% in May with a slightly outside chance of the peak extending to 5.25% in June.Īnd what matters most is the change in that outside chance of the extra 25 basis points for June being more and more priced in. This is known as the terminal rate, and we are approaching it… Maybe. ![]() Tapering, pivot, neutral rate, fed funds target range, quantitative tightening…īut something that has become more and more key as we have gone through this (seriously) rapid rate hike cycle that started at the beginning of 2022 is where the peak in interest rates in the US will be. When looking at what’s going on in the world of interest rates, it’s pretty easy to get lost in the different terms central bankers and financial media use. What is the Terminal Rate and Why Does It Matter?
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