What is the terminal rate?

The terminal rate is the endpoint of a central bank's policy-rate path — the level at which the policy rate is expected to settle once a hiking or cutting cycle completes. It is inferred from forward OIS or SOFR futures and anchors front-end yields and rate-cut expectations across the curve.

How is the terminal rate different from r* (the neutral rate)?

The terminal rate is the nominal policy-rate endpoint markets actively price from the forward curve, whereas r* is the unobservable equilibrium real rate consistent with full employment and stable inflation. The terminal rate can sit above or below the neutral level depending on whether policy is meant to be restrictive or accommodative at cycle's end.

Why does the terminal rate matter for the yield curve?

The terminal rate matters because it anchors the front end of the yield curve — the segment most sensitive to expected policy. A drift higher in terminal pricing lifts two-year yields even if cuts are still expected, while a lower terminal can pull the front end down and steepen the curve via the expectations channel.

How do markets calculate the terminal rate?

Markets calculate the terminal rate by reading the forward path embedded in OIS and SOFR futures: starting from the current policy band and subtracting the cumulative cuts (or adding hikes) priced across the cycle. If a cycle prices 35 basis points of total easing, the implied terminal rate sits roughly 35bp below the current policy rate.

This Is LedgerPrediction-native macro publication

Glossary

terminal rate

terminal policy rate · cycle endpoint rate · peak policy rate

The terminal rate is the endpoint of a central bank's policy-rate path — the level at which the policy rate settles once a hiking or cutting cycle completes. Markets price it from the forward curve, and it anchors the front end of the yield curve and rate-cut expectations.

How it works

The terminal rate is inferred from the forward path embedded in OIS/SOFR futures: the market's expected resting level of the policy rate after the current cycle resolves. In a cutting cycle it is the trough the policy rate is expected to reach; in a hiking cycle, the peak. It differs from r* (the neutral real rate) — terminal rate is the nominal policy endpoint markets price, not the unobservable equilibrium rate.

Why it matters now

In 2025–2026 the Fed's terminal rate is a live tug-of-war: sticky services inflation and tariff pass-through argue for a higher resting level, while a softening labour market pulls it lower. With cycles priced as little as 35bp of total easing, small shifts in terminal pricing move the entire front end.

Example

In our briefings the full Fed easing cycle was priced at roughly 35 basis points total — implying a terminal rate barely below the prevailing policy band. That compares with the December 2018 cycle, when markets initially priced a terminal rate near 3% before the Fed pivoted in early 2019 and the implied endpoint collapsed toward 1.5% within twelve months.

Mechanism

terminal rate ≈ current policy rate − Σ(priced cuts) or + Σ(priced hikes), read off the forward OIS/SOFR curve

How desks use it

Reading the forward OIS curve to infer the Fed's expected cycle endpoint
Separating front-end repricing into terminal-rate drift versus path timing
Comparing market-priced terminal rate against the SEP dot-plot longer-run dot

Key moves

2018-12Fed priced toward a ~3% terminal rate before the early-2019 dovish pivot collapsed implied endpoint pricing.
2023Hiking-cycle terminal rate repriced repeatedly higher as core inflation proved sticky, peaking near the 5.25–5.50% band.

Frequently asked

What is the terminal rate?: The terminal rate is the endpoint of a central bank's policy-rate path — the level at which the policy rate is expected to settle once a hiking or cutting cycle completes. It is inferred from forward OIS or SOFR futures and anchors front-end yields and rate-cut expectations across the curve.
How is the terminal rate different from r* (the neutral rate)?: The terminal rate is the nominal policy-rate endpoint markets actively price from the forward curve, whereas r* is the unobservable equilibrium real rate consistent with full employment and stable inflation. The terminal rate can sit above or below the neutral level depending on whether policy is meant to be restrictive or accommodative at cycle's end.
Why does the terminal rate matter for the yield curve?: The terminal rate matters because it anchors the front end of the yield curve — the segment most sensitive to expected policy. A drift higher in terminal pricing lifts two-year yields even if cuts are still expected, while a lower terminal can pull the front end down and steepen the curve via the expectations channel.
How do markets calculate the terminal rate?: Markets calculate the terminal rate by reading the forward path embedded in OIS and SOFR futures: starting from the current policy band and subtracting the cumulative cuts (or adding hikes) priced across the cycle. If a cycle prices 35 basis points of total easing, the implied terminal rate sits roughly 35bp below the current policy rate.

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