While a few rate cuts seem appropriate (per the Fed’s own estimates), the market’s earlier expectations for 6-7 rate cuts are getting unwound. As of last week, the forward curve is pricing in a 3.7% fed funds rate in 2025. Even that seems too low, but it’s better than the low-3’s priced in at the beginning of the year.
For me, the simple math is that if inflation settles in at 3% (3 is the new 2), and the economy has soft-landed, then the real policy rate should be at least +100 bps. That would take us to a 4-4.5% funds rate, which is in line with the fed’s own targets.