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U.S. INTEREST RATE traders have started to anticipate a slowdown in the business cycle that will bring inflation under control and then encourage the central bank to start trimming interest rates slightly to support growth later in 2023. Policy-controlled short-term rates are expected to peak at 3.00-3.25% by August 2023, up from 0.75-1.00% currently, before dipping slightly at the end of 2023 and into 2024.
The implied trajectory is consistent with inflation under better control by mid-2023 and a slowdown in the business cycle that will cause the central bank to shift its focus to supporting growth. A similar pattern occurred during previous interest rate tightening and “soft-landing” cycles in 1966/67 and 1994/95.
As a result, the U.S. Treasury yield curve between two-year and ten-year notes has started to steepen slightly, usually a sign of an impending business cycle slowdown that will eventually cause the central bank to reverse some of its expected interest rate rises: