The Market Is Looking For A Pivot Next Year But The Fed Needs To Decide Whether To Endorse That View

Key Takeaway: While yields broke out to new highs this week, the bond market is still skeptical of the Fed's intentions to keep rates higher for longer.

More Context: Fed funds futures are currently pricing in rate cuts after four of the eight FOMC meetings next year. Even as the Fed's message is that rates will need to stay higher for longer, the bond market expects 100 basis points for easing next year. Some of this is the Fed's own fault. Their reaction function over the past decade has been biased toward easing, being slow to raise rates and quick to cut them. Additionally, the Fed's own economic projections showed that as of June the median FOMC member expected rates to fall by 100 basis points over the course of 2024.

Now, as 2024 comes into clearer focus, the Fed will have a chance to reiterate this view or try to guide the market away from expectations for so much easing. That begins next week at the annual Jackson Hole Economic Symposium (conveniently titled "Structural Shifts in the Global Economy). At the September FOMC meeting, the Fed will publish an updated round of economic projections.

If the Fed is going to back away from next year's pivot, the recent rise in bond yields could just be the beginning of a protracted move higher at the long-end of the yield curve. Either way, the focus now is turning to 2024.