FED FUNDS

During Powell’s recent Jackson Hole speech, he repeatedly said the labor market is weaker than pre-Covid, when Fed funds was 1.75%! Currently, markets are expecting a terminal Fed funds rate of 3.25%, with 100bps of cuts through December and another 100bps in CY2025. 3.25% seems improbably high, as the neutral rate is maximally 2.75%. By invoking pre-Covid times, Powell’s hinting the terminal rate may well be lower than markets expect.