2024 Interest Rate Markets Year End Review

As another exciting year comes to a close, we stop to reflect on the last twelve months to highlight just how unpredictable markets can be. This was a year when the world crept forward month by month and small changes in economic data sparked outsized swings in forward rates.

Influential events of 2024 include the Federal Reserve in the spotlight (navigating unemployment and sticky inflation), robust consumer spending that defied all recession expectations, productivity gains and the promise of AI, and the potential tailwinds of Donald Trump’s re-election and Republican control of Washington.

Year-End Comparison (2023 vs 2024)

The year-end snapshot below masks the amount of volatility and number of about-faces that drove markets this year. If you fell asleep at the end of 2023 and work up a year later, you’d see floating rates down by 1.00%, long-term yields and borrowing rates up 0.50% to 0.75%, and your equity and Bitcoin investments at all-time highs!

If you were following along daily like we were, you’d have a bit of whiplash with markets pricing in a good chance of recession in January (lower rates!), then inflation fears firing back up April (higher rates!), then unemployment driven recession fears in September (lower rates!), then the all-clear with strong economic data and political tailwinds to end the year (higher rates!)

Over the course of the year, we saw markets price in anywhere between 1 rate hike to 8 rate cuts emphasizing just how much nobody knew what was going to happen. This resulted in outsized +/- 225 basis point swings that could shake even the most seasoned trader, however, volatility can work in our favor. Borrowers who were smart (or lucky) and quick enough to take advantage of these deep inversions through outright or pay-fixed swaps were able to realize significant savings (as well as peace of mind).

The Normalizing Yield Curve

January began with markets more worried about recession than inflation. This materialized in a deeply inverted yield curve pricing 8 rate cuts in 2025 (-2.00%). As rate expectations changed, we saw this curve shift 1.00% higher, then lower, then settled somewhere in the middle. With the Fed bringing the front of the curve lower and the longer end increasing, we finally saw the return of a more normal (upward sloping) yield curve for the first time since 2022.

Changes in the Yield Curve (2024)

Source: Bloomberg

The Year of the Fed

The Fed has roared back in the past few years to show exactly why they’re considered one of the most powerful institutions in the world.

After much deliberation, the FOMC cut the Fed Funds Target Rate by 1.00% in the final months of the year (Sept|5obps, Nov|25bps, Dec|25bps). The move was cheered by markets but seemed a bit premature with inflation remaining sticky and above the Fed’s 2.00% target. Their reasoning for the cuts was the unexpected weakness in the employment numbers and reminded us of the Fed’s ‘dual mandate’ which requires attention to both full employment and inflation.

At the year’s final meeting, the Fed said future rates cuts would hinge on more substantial progress in the inflation numbers. Peak inflation this cycle hit 9.1% in summer of 2022. Since then, inflation has come down to 2.5% to 3.0% and has remained there throughout the year. Combine this with expectations of new fiscal growth policies, some market participants are preparing for a no cut scenario in 2025.

The Impossible Soft-Landing

Personally, I started the year as a ‘hard-lander’ expecting markets to crash due to high rates and inflation putting too much pressure on the consumer. I underestimated the impact of asset gains, pandemic stimulus and savings, as well as the benefits of the low fixed rates that consumers and corporations locked in during the zero-rate era.

Month after month the economic data continued to defy expectations and consumers spent healthily while employment numbers remained steady. Some credit is due to early advances in Artificial Intelligence and productivity gains that has allowed corporations to grow profits without shedding too many jobs.

The dramatic Trump comeback and Republican sweep of the House and Senate put the final nail in the coffin of recession fears (and my doubts about the economy). With the prospect of a healthy consumer as well as a friendly business and tax environment, the economy does not appear to be facing many headwinds (in the near term at least).

What’s in Store for 2025?

Future Fed moves continue to be ‘data dependent’ and are now more focused on the inflation numbers which means we will continue to be watching the data month-to-month (more volatility). We’ll continue to calibrate as economic data rolls in and should have a better idea of where this economy is headed.

Speaking of volatility, it may be prudent to prepare for some wild swings in the first half of the year with the ambitious Trump agenda taking shape. Expect the administration to make a lasting mark in the first 100 days through executive orders that could make for sweeping changes. Policy run through the government machine, however, takes time and many proposals may get watered down with slim margins in the House and Senate (potentially calmer second half of the year).

Although near-term risks have subsided, we always recommend being a little skeptical and keeping an eye out for tail risks as markets can change very quickly. Here are some risks to keep an eye on for 2025 and beyond:

1. Longer-Term Inflation / Higher Rates: With a strong economy and potential for additional fiscal stimulus (not to mention deficit spending), the Fed may be right to be concerned with inflation moving in the wrong direction. Depending on the data, we could see rates move higher with some economists predicting 1o-year Treasury yields to hit 5.00% again in 2025.

   
   

2. Geopolitical Risk: With the return of the Trump administration, we may be in for more Trade Wars and War Wars. America First policies may lead to additional power vacuums in other areas of the world leading to unexpected conflict and its downstream impact on the world economy.

   
   

3. Asset Bubbles: Although the incredible economy shows no signs of stopping, asset prices have already increased rapidly and may undergo a period of correction (equities, real estate, cryptocurrency). Consumers have been relying heavily on savings and asset gains to fuel spending and a severe correction may trigger a significant slowdown in this economic engine.

   
   

4.  Consumer Fatigue: Consumers have been the hero of this economy, but underlying the strong spending is a tale of two consumers (higher and lower income). Overall price levels still remain high, and signs of stress have appeared in both segments. Consumer debt levels and defaults have been increasing as well as documented downshifts in spending to stretch the dollar (Costco vs Target). If the consumer gets stretched too thin, we may see this economy unexpectedly stall.

   
   
   
   

Thank You and Happy New Year!