Terminal Rate

Terminal rate means the highest level investors or policymakers expect interest rates to reach in a rate-hiking cycle. In simple terms, terminal rate is the expected peak interest rate. The terminal rate is important because markets care not only about whether rates rise, but how high they may ultimately go. A higher expected terminal rate can pressure stocks and push bond yields higher. For example, if investors think the Fed will raise rates to 5.5% before stopping, 5.5% may be viewed as the expected terminal rate. The terminal rate is not fixed in advance. It can change when inflation, jobs, growth, or central bank guidance changes.