The first chart below shows that the FOMC continues to revise higher where they think the Fed funds rate will be by the end of 2026.
The second chart shows that the Fed continues to revise higher where they think the Fed funds rate will be in the long run.
The third chart shows that the market continues to revise higher where it thinks the Fed funds rate is going.
The entire purpose of the Fed in keeping interest rates higher for longer is to slow down consumer spending, capex spending, and corporate earnings so that inflation begins to move lower toward the Fed’s 2% inflation target.
The bottom line is that interest rates staying higher for longer is the number one theme in markets as we enter 2025.
This has significant implications for asset allocation and portfolio construction because the most important variable in the finance textbook is the risk-free interest rate. When the risk-free rate goes up, it raises the bar for returns on equities, particularly in a situation where returns in equities have been driven entirely by a handful of tech stocks. In short, higher for longer has important implications for how investors should think about debt versus equity in 2025.
Sources: Bloomberg, Apollo Chief EconomistSources: Federal Reserve Board, Apollo Chief EconomistSources: Federal Reserve Board, Bloomberg, Apollo Chief Economist
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