Markets price in a peak rate for Fed Funds of 3.4% in Feb ’23

The peak Fed funds rate is currently priced in at a level of 3.4% (down from >4% in mid-June) for February 2023. However, the shape of the curve is of even greater importance. The inverse shape of the current Fed futures curve indicates that the market expects the Fed to succeed with its measures to curb inflation. After peaking at around 3.4%, interest rates are expected to fall towards ~3% by mid-2023 and even approaching 2% in 2024. This implies a (too?) favourable outcome with falling inflation figures and the avoidance of a severe recession. While this interpretation might prove correct, the risk remains high that inflation is more stubborn and interest rates could trend upwards again and/or remain at an elevated level for longer.

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