SOFR Interest Rate Update - November
November 19, 2024
On November 7th, the US Federal Reserve (the Fed) concluded their November meeting by announcing their second consecutive rate cut, lowering US Federal Funds Rates (Fed Rates) by 25bps to a range of 4.50%-4.75%.1 Similar to September’s 50bp cut, this was largely anticipated by both markets and analysts. That expectation was driven both by Fed Chair Jerome Powell’s public comments since the Fed’s most recent meeting in September and the continued positive economic data.
In his post-meeting press conference, Powell took a similar tone as he did in his prior one, noting that inflation had “eased substantially from a peak of 7% to an estimated 2.1% as of September.”2 He also noted the Fed remains confident that inflation is moving sustainably towards their 2% goal and that they “see the risks to achieving [their] employment and inflation goals as roughly in balance” and that the rate cut decision was a “further recalibration of [their] policy stance”.2
While Powell acknowledged the continued signs of strength in the US Economy, he also noted that “reducing policy restraint too quickly could hinder progress on inflation” and that the Fed will continue to carefully assess all the data to ensure they don’t lower rates too fast (and risk inflation rebounding) or too slow (and risk undue harm to the US economy).2 These comments are largely in line with what Powell has been saying for several months now and come as no surprise.
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 to monitor between now and our next update.
Chart 1 below compares our current Secure Overnight Financing Rate (SOFR) projections to our September 19th projections. These rates are based on the most-current Fed Dot Plot and the SOFR Forward Curves on each date shown. While current year rates are down slightly vs September, projected rates have increased by an average of 42bps throughout the next seven years. We believe this increase is being caused by a myriad of factors; with the largest ones being the continued resilience of the US economy decreasing the pressure to cut rates and an increased belief that the “neutral” Fed Rate may be higher than the 2-2.5% range it was pre-pandemic. Our long-term rates remain unchanged, as they are derived by the Fed’s “Longer Run” Dot Plot median, which will not be updated until the Fed’s December meeting.
Y1-7 Average Difference: 0.42% | Y1-10 Average Difference: 0.30%
It’s impossible to discuss what the Fed will do in 2025 and beyond without considering President-elect Trump and the election results, both of which Powell fielded questions about in his post-meeting press conference. When asked about how the Fed would react to anticipated policy decisions by the next administration, Powell responded, “the election will have no effects on our policy decisions” and they were not interested in speculating about the impact of policies that have not been implemented. 2 While he did acknowledge that “any administration’s policies or policies put in place by Congress could have economic effects over time”, he noted that it takes time for fiscal policy changes to pass in Congress and even more time to impact the economy. Powell further elaborated that the Fed would factor any changes in economic projections in their forecasts and will act on those policy changes in accordance with their dual mandate of fighting inflation while maintaining maximum employment.
There remains a big question of what the Fed will do in December and how that might set the tone for their plans in 2025 and beyond.
Chart 2 below 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). Looking at September’s Dot Plot Chart, the governors were split regarding how many rate cuts to make before the end of 2024: with nine governors voting for a single rate cut and ten voting for at least two cuts. Chart 2 also highlights the discrepancy between the Dot Plot and what markets are now projecting. While the Dot Plot projected rates in the mid three percent range in 2025 and just under two percent thereafter, Chatham’s forward curve is now anticipating rates to stay in the mid-to-high three percent range going forward. Powell was asked about this discrepancy and whether the September rate projections were still valid, but he largely sidestepped it, answering that he “wouldn’t want to comment one way or the other” regarding what he expected from projections following the Fed’s December meeting.2
This data fluctuates daily, and what is depicted above is as of 11/12/2024.
Finally, Chart 3 shows CME Group’s rate probability tool, as of November 12, 2024. This shows their projection of what Fed Rates will be after the next nine Fed meetings. These projections have changed substantially since September, with the odds of an additional rate cute in December down from 100% to approximately 50%. In the longer term, CME went from projecting ~60% odds that Fed Rates will be below 3.0% by next October to less than 10% odds now.
This data fluctuates daily, and what is depicted above is as of 11/12/2024.
This volatility in rate projections highlights the lack of certainty by analysts in both where the economy is going and what the proper response by the Fed would subsequently be.3 This uncertainty extends to the Fed as well. While the vote to cut rates this month was unanimous, the September Dot Plot demonstrated a lack of consensus in the group. This is in addition to one governor (Michelle Bowman) voting against the decision to cut rates by 50bps in September, the first dissenting Fed vote in over two years.
Regardless of the outlook on future interest rates, the Fed has cut rates by a combined 75bps in their last two meetings and that is great news for those looking for relief from high interest rates. While the exact speed of future cuts is still to be determined, the general direction and focus of the Fed is not up for debate. In September, Powell clearly signaled the Fed’s “wait and see strategy” is over and the time for rate cuts is now. While Powell stressed in this month’s press conference that they aren’t ready to declare victory over inflation and that there was still work to do, his primary focus was on the progress that had been made and trying to lower rates before the US economy weakens. Barring any significant changes in economic projections, all signs indicate that Powell will continue to work to steer the economy toward the “soft landing” he’s been targeting for the past year.
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/monetary20241107a1.pdf
[2] https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20241107.pdf