SOFR Interest Rate Update - June

On June 13th, another meeting of the US Federal Reserve (the Fed) came and went with the Fed holding US Federal Funds Rates (Fed Rates) steady, as they have since their last increase in July 2023¹.  While the decision to hold rates steady is the same as it was in their prior six meetings, there is slightly more optimism surrounding this month’s meeting, as compared to the last several. This is due partially to the mild inflation report earlier in the day suggesting price pressures had moderated², and partially to both the European Central Bank and Bank of Canada cutting rates over the last month³. However, the Fed is in a different position than both of those central banks; with much stronger growth continuing despite higher interest rates⁴. 

Instead, Fed Rates held steady and Fed Chair Jerome Powell’s comments echoed what he’s been saying for several months. He affirmed the Fed’s commitment to their long-term goal of 2% inflation, and stated they “do not expect it will be appropriate to reduce the target range for federal funds rate[s] until we have gained greater confidence that inflation is moving sustainably towards 2 percent. So far this year, the data [has] not given us that greater confidence.”⁵  Shortly thereafter, Powell also acknowledged that recent inflation readings have been more favorable than early 2024 and they are cognizant that lowering rates too little or too late would unnecessarily put stress on the economy and employment rates—acknowledging the tightrope they continue to walk with their “wait and see” approach⁵.

As this was the Fed’s final meeting of Q2, they released updated economic projections, including the Dot Plot chart. The updated Dot Plot changed noticeably, as compared to March in both short and long-term projections. In March, the majority of governors (15/19) had at least two rate cuts penciled in for the year, with 10 anticipating at least three⁶.  Comparatively, June’s Dot Plot showed much less belief in rate cuts, with eight governors projecting two rate cuts and the remaining projecting either one (7/19) or no cuts (4/19)⁷.  Similarly, the Fed’s “Longer Run” projections saw a marginal increase in the median range (from 2.625% to 2.75%), signaling that more Fed governors may believe persistent higher rates will be required to combat inflation. With that said, there is a large gap in the Fed’s “Longer Run” projections, ranging from 2.375% to 3.75%.  

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 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). While the Dot Plot projections increased, markets have decreased their assumptions since our last May rate update. While seemingly counter-intuitive, this caused the two projections to converge, as markets were much more bearish than the Fed on how swiftly rate cuts would begin last month.

This data fluctuates daily, and what is depicted above is as of 6/13/2024.

Chart 2 below compares our current Secure Overnight Financing Rate (SOFR) projections to our May 2nd projections. These rates are based on the most-current Fed Dot Plot and the SOFR Forward Curves on each date shown. Our current-year assumptions remain unchanged, while assumptions in years 2-6 have fallen by an average of 42bps. Long-term assumptions, beginning in year 8, increased in response to the Fed’s “Longer Run” Dot Plot projections.

Y1-7 Average Difference: -0.30%   |   Y1-10 Average Difference: -0.18%
 

Data derived from Forward SOFR Curve provided by Pensford and Fed Dot Plot Data. This data fluctuates daily, and what is depicted above is as of 6/13/2024.

Finally, Chart 3 shows CME Group’s rate probability tool, showing their projection for what Fed Rates will be after the next nine Fed meetings. This shows the increased optimism about the pacing of rate cuts compared to our May update, which predicted a 54.1% probability of two or fewer rate cuts through the end of Q1 2025. Now, they’re showing a 72.0% probability of at least three rates and 37.6% probability of four or more over the next nine months.

This data fluctuates daily, and what is depicted above is as of 6/13/2024.

Ultimately, the Fed continues to signal their commitment to their “wait and see” strategy and have held steady on their stance throughout fluctuating inflation and economic data over the past several months. While the Fed remains attentive and ready to react, they have shown they are content to hold rates steady until the data gives them confidence in the next course of action. While most analysts and investors still believe the question of rate cuts are “when” and not “if”, rates are unlikely to move in any substantial way until either inflation is down substantially or a spike in unemployment forces their hand. 

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/monetarypolicy/files/monetary20240612a1.pdf  
2: https://www.wsj.com/economy/central-banking/cpi-report-fed-meeting-interest-rate-ef93c8b0?st=ghikepg7ott2s6a&reflink=desktopwebshare_permalink  
3: https://www.wsj.com/economy/central-banking/european-central-bank-cuts-interest-rates-first-since-2019-b2707c65?st=o3hxs7r0g8b2jb5&reflink=desktopwebshare_permalink  
4: https://www.wsj.com/economy/central-banking/stung-by-past-mistakes-a-wary-fed-takes-its-time-e361a364?st=mmi2qrgnq1g0w9i&reflink=desktopwebshare_permalink  
5: https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20240612.pdf  
6: https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20240320.pdf  
7: https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20240612.pdf