The US Federal Reserve releases a feast of forecasts four times every year and the latest set of Fed projections arrived last night. The first thing we at almanis should do is take stock of what members of the Federal Open Market Committee (FOMC) – the group responsible for setting monetary policy in the US – are projecting and compare it with the collective thinking of the almanis crowd.
Back in late-December, shortly after the Fed had raised rates for the first time in seven years, we asked the crowd whether or not the Fed would raise rates by a further 100 basis points over the course of 2016. The response so far is shown in the first chart below. Initially the crowd thought this was a reasonable proposition. History has taught us that Fed tightening cycles tend to progress at at least that pace and the FOMC themselves were projecting a similar experience this time around. Then, in January, financial turmoil hit global markets and the almanis crowd reassessed. Lately, the crowd has settled around the 10% mark.
So what are the FOMC’s own projections for rates by end-2016? These are shown by the red line in the second chart below. Yesterday’s projections, since you ask, put the FOMC’s mean estimate for tightening over 2016 at 65 basis points. Note that these projections are based on economic forecasts which assume that events unfold as expected and do not take account of tail-risks as almanis forecasts or market prices would tend to.
It’s clear that members have been rapidly scaling back their expectations of tightening since they peaked in September 2014. Expectations for the appropriate policy rate over the longer-run have also been edging lower ever since the Fed started publishing these projections back in January 2012.
Let’s compare all this to what the market has been pricing in. The third chart below shows the rate at which the CME Fed Funds Futures Curve implies rates will be following the Fed’s last meeting of December 2016. First thing to note is that the market is answering a different question to the almanis crowd and the FOMC – the relationship between the three might be the subject of a longer blog post a little later on – but it’s worth noting at as a point of comparison.
Sadly, I’ve got to stop here. I’ve got plenty to say on this subject but it’s not for me to lead the crowd here. That’s not what this blog is for. If you’d like to look closer at this subject but don’t quite have the economics or market background, do get in contact through the “Contact Curator” button on the site or email us here. Personally, I’m happy to share bits of what I’ve learnt from over ten years at the thick-end of global capital markets. Hopefully, we can create a mini-almanis community focusing on Fed policy and US economic prospects in which our forecasters can develop their individual and collective intelligence over time.