Artem Voloskovets
On June 5, the Effective Federal Funds Rate held at 3.62%, unchanged from June 4. The lack of movement is the story.
A Rate That Has Stopped Moving
Banks use the federal funds market to lend reserves to one another overnight. The Effective Federal Funds Rate tracks the average cost of those transactions. At the peak of the Federal Reserve's tightening cycle, the rate traded above 5%. Since then, it has gradually declined alongside policy easing.
Today, the chart looks different. Instead of trending higher or lower, the rate has settled into a narrow range.
That usually happens when markets see little reason to adjust expectations for monetary policy.
June Is Already Priced In
The next Federal Reserve meeting is less important than the market's expectations for it. Current pricing shows a 98.2% probability that policymakers will leave the target range unchanged at 3.50%-3.75%. The probability of a rate cut stands at just 1.8%.
Markets are not debating whether the Fed will act in June. They are debating how long rates will stay at current levels. That distinction helps explain why overnight borrowing costs have barely moved in recent weeks.
One Chart Explains the Fed's Caution
Inflation has cooled considerably from the highs of 2022, but progress has slowed. Consumer prices are rising at an annual pace of roughly 3.4%, while core inflation remains close to 2.8%. Energy is the outlier.
The energy index is running nearly 18% higher than a year ago, far above the pace recorded for food and core categories. That is enough to keep the pressure on. Inflation is lower than it was two years ago, but it is still above target and vulnerable to another energy-driven acceleration.
What 3.62% Means Right Now
The current EFFR reading is not signaling stress in funding markets. It is not signaling an imminent rate cut either. Instead, it reflects a market that has largely settled on one view: inflation is no longer surging, but it has not fallen far enough to justify aggressive easing. As long as that balance remains intact, the federal funds rate is likely to remain where it is today.
Artem Voloskovets
