At the start of the year, the market was pricing in a sharp turn from the FOMC after a failure to get to the 5-5.25% dot plot peak that was followed by rates falling to 3.5% in 2024.
It turns out that it was too early to fight the Fed.
Now, market pricing looks far more like the Fed dot plot with the July terminal rate at 5.25% in Fed funds and rates holding at 5.03% into year end.
Much of that reflects the realization that the US isn't headed towards a hard landing and probably not a recession at all. That's a big change from the turn of the year when the question was how hard the landing would be.
Fed speakers are now emphasizing data dependence but it's going to be tough for them to signal a clear move to the sidelines, like the Bank of Canada did last month. Instead, they're likely to keep their options open and that will add volatility to every economic data release.
