Market's more modest interest-rate expectations

Following last week's Federal Reserve meeting in which it raised the federal funds rate by 50 basis points to a targeted 4.25% to 4.5%, the market expects a more modest interest-rate path. Traders are now pricing in a 61% chance that the Fed will increase the fed funds rate to 4.5% to 4.75% at its Feb. 1 meeting, based on the CME FedWatch Tool that tracks trading in the 30-day fed funds futures. However, that's down from the 75% probability on Dec. 16. Before the latest meeting, traders priced in a 52.5% chance.

Longer-term Treasury yields have fallen modestly since the start of December. The 2-year yield was 4.17% as of Dec. 16, down from 4.25% on Dec. 1. During that span, the 10-year yield dropped by 5 basis points to 3.48%.

Next year, analysts expect Treasury yields to increase during the first quarter before dropping. They predict the 10-year yield will increase to 4.01% in the next three months before dropping to 3.5% and 3.2% at the end of 2023 and 2024, respectively.