SOFR Interest Rate Update - Mid-August
August 13, 2024
What a difference two months can make. While the US Federal Reserve’s (the Fed’s) decision to hold US Federal Funds Rates (Fed Rates) steady after their 7/31 meeting marked the 8th straight meeting with no movement in rates, the tone surrounding the Fed’s path forward has changed markedly since their June meeting. Fed Chair Jerome Powell’s post-meeting press conference built on his public comments throughout the month of July and paved the way for a likely rate cut in September. Inflation continues to decrease month-over-month, with the Fed’s preferred inflation indicator down to 2.5%, versus its 2022 peak of 7%.1
In his press conference, Powell focused much more on the signs of a cooling labor market and highlighted the Fed’s focus on not leaving rates high for too long, noting he “would not like to see material further cooling in the labor market.”2 Many analysts and investors viewed his comments as further evidence the Fed believes the threat of a recession now outweighs recurring inflationary risks. Powell did nothing to dissuade the increased sense of optimism that the Fed was preparing for a rate cut in September, even specifically noting, “a reduction in our policy cate could be on the table as soon as the meeting in September.”1 This is noteworthy, as Powell had thus far avoided speculating on specific dates for potential future cuts throughout the last two years.
As July came to an end, many analysts and investors believed a September rate cut was all but certain and that belief has only gained traction throughout early August. Following the Fed’s meeting, the Bank of England announced its first rate cut since 2020, citing cooling inflation and job markets.3 This was followed by economic data from the US Labor Department showing that hiring slowed to 114,000 jobs and unemployment hit 4.3% (its highest level since 2021).4 This led to a spike in volatility and a sharp decline in US equity markets, as many worried the US could be heading towards a recession.4 While equity markets have slightly rebounded and began to stabilize during the first week of August, there is still considerably volatility, both in the markets and interest rate forward projections.
Following the Fed’s meeting, we’ve updated our borrowing rate assumptions to reflect the current outlook. Below are charts and additional analysis showing forward rate projections and key items of interest to monitor between now and our next update.
Chart 1 below compares our Secure Overnight Financing Rate (SOFR) projections to our June 13th projections. These rates are based on the most-current Fed Dot Plot and the SOFR Forward Curves on each date shown. With increased confidence for multiple rate cuts before the end of 2024, our current-year assumptions are down slightly, with further decreases in the following years. While our long-term assumptions (years 8+) remain unchanged, our borrowing rate projections are down an average of 27bps over the next 7 years relative to our mid-June projections.
Y1-7 Average Difference: -0.27% | Y1-10 Average Difference: -0.19%
Chart 2 shows the new Dot Plot (gray dots), along with the Dot Plot median (blue dots) and current SOFR forward projections from Chatham Financial (blue line). The Dot Plot remains unchanged from our last update, and the decreased forward curve projections versus our June update reflect the changing economic outlook and market’s increased expectation of rate cuts in the coming months.
This data fluctuates daily, and what is depicted above is as of 8/8/2024.
Chart 3 shows CME Group’s rate probability tool, as of August 1, 2024. This shows their projection for what Fed Rates will be after the next eight Fed meetings. Chart 4, which shows the same data as of August 8, 2024, was included to demonstrate how quickly forward interest rate projections are moving day-to-day right now.
This data fluctuates daily, and what is depicted above is as of 8/1/2024.
This data fluctuates daily, and what is depicted above is as of 8/8/2024.
While it is possible that we could find ourselves in a similar situation as late 2023/early 2024, when optimism for rate cuts quickly increased before strong economic growth and increased inflation forced the Fed to hold rates longer, that is less likely now. The current expectation of rate cuts is based on several months of inflation and the labor market cooling, as compared to only two months of positive inflation data at the end of 2023.5
As the Fed increasingly turns its focus to avoiding undue damage to the labor market and the US continues to be at risk of entering a recession, pressure for the Fed to begin meaningful rate cuts will increase. The Fed’s September meeting will be a monumental one, both due to the potential for its first rate cut in this cycle and for what roadmap Powell and his fellow governors will set with their updated economic projections and Dot Plot chart.
Schechter constantly monitors interest rates and updates our rate projections for our Premium Finance designs a minimum of once per month and following every Fed meeting. We will update additionally as needed based on the markets and various influencing factors. If you have any questions or would like to discuss interest rates or any other ongoing economic developments, please reach out to our team to schedule a call.
Sources:
[1] https://www.federalreserve.gov/mediacenter/files/fomcpresconf20240731.pdf