Inflation has been gradually lowering since it hit its peak of 9.1% in June 2022, but we are just not there yet as it hovers around 4%. Given this, we can expect rates to stay “higher for longer” until the Fed’s 2% inflation goal is achieved. In terms of the long-term view for rates, markets are currently pricing that the Fed funds rate will bottom at 4% in 2025 and start rising again from there. The same profile can be seen for the European Central Bank, where rates are expected to bottom at 3% and then begin to rise. Against this backdrop, investors can plan on rates being permanently higher. In other words, rates are not going back to zero, like they were from 2008 to 2020, and the cost of capital is expected to stay higher for the foreseeable future.
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