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Terminal rate

The highest policy rate the market expects in the current tightening cycle, or the lowest in an easing cycle; read off forwards rather than announced.

The terminal rate is a market construct, not a Fed publication. You extract it from the peak of the ois or fed-funds-futures strip. It moves constantly with data, and its repricing is usually the single biggest driver of the 2-year note.

Distinguish the terminal rate from the neutral-rate. Terminal is where policy is expected to stop, which in a tightening cycle is normally well above neutral; neutral is where policy exerts no force at all.

Example: the OIS strip peaks at 5.38% in the June contract. The current midpoint is 4.875%, so the market prices two more 25 basis point hikes with the peak six months out. A hot CPI print pushes the peak to 5.63% and the 2-year sells off 20 basis points.

Related: fed-funds-futures, ois, neutral-rate, dot-plot, rate-cut

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