Rates: Higher for Longer It Is! 

Ian Culley
February 9, 2024

From the Desk of Ian Culley @IanCulley

Whenever a fellow parent asks what I do, I tell them I comment on interest rates.

I’m not involved in the semiconductor industry or the AI revolution. I don’t rob community banks (a personal favorite, despite mixed reactions). And I certainly do not analyze fixed-income, forex, and commodity markets (that’s a show-stopper).

The only thing people want to know these days – whether they’re navigating Wall St. or Main St. – is where rates are headed. 

But no one seems to be listening to the one person who has a direct impact on the direction of US Treasury yields…

Of course, I’m talking about Fed Chair Jerome Powell.

For most of last year, his mantra regarding rates was “higher for longer.”

Yet the bond market was pricing in at least five rate cuts in 2024.

Here’s what the target rate probability table – based on fed fund futures – looked like toward the end of December:

The bond market was pricing in a 72.8% chance of a 25 basis point cut at the March meeting and a greater than 50% chance of a target rate as low as 400 basis points (five cuts) by September.

Fast forward to today, and those probabilities have flipped:

The bond market is now pricing in an 18.5% chance of a cut in March. (It’s not happening.)

And those five cuts taking us to 400 basis points have been kicked down the road to December. 

Markets continue to adjust to the shift in expectations. But they’re still pricing in five cuts this year after Powell made it clear we’re in store for three at most!

Plus, five rate cuts by December doesn’t sound like a "soft landing" to me. Imagine the market environment under aggressive rate cuts – not bullish.

I’m convinced no one is paying attention to Powell except Nick Timiraos.

Honestly, I don’t use these probability tables as a guide to where rates are headed. Instead, I view these tables as positioning and sentiment indicators.

When it comes to gauging the direction of interest rates, I simply follow the charts and the underlying trend:

The uptrend remains intact. And I have to err in that direction.

Sure, our tactical bond trade worked late last year. But last week’s long bond trade was dead on arrival.

That’s information.

I recently outlined some logical retracement levels for the 30-year and 10-year yields. A deeper pullback in rates makes sense in the context of a larger uptrend. But it doesn’t mean they will anytime soon.

If I’m in a holding pattern outside the playground gate or dishing out snacks on the sidelines and someone asks where rates are headed, I tell them higher – at least for now.

Am I crazy?

Will rates tumble this year? 

And when do you think the Fed makes its first cut?

-Ian

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