4 Charts: An Appraisal Of The Fed's Perennially Faulty Forecasts

4 Charts: An Appraisal Of The Fed's Perennially Faulty Forecasts - Hawk dove cartoon 06.06.2016

 

Do you believe the Fed's forecasts?

 

Well ... do you?

 

You shouldn't.

 

Take a look below at the downwardly-revised projections for the year-end 2016 Fed Funds rate (via the median of the FOMC's dot plot) in the green line below. At its height in 2014, the FOMC expected the year-end 2016 Fed funds rate to be just shy of 3%.

 

The FOMC's March forecast? Under 1%. 

 

Click to enlarge. 

4 Charts: An Appraisal Of The Fed's Perennially Faulty Forecasts - fomc dot plot revisions

 

Looking out a few years, via their latest projections from March, the Fed heads expected the Fed funds rate will be just below 2% in 2017 and, in 2018, hit 3%.

 

4 Charts: An Appraisal Of The Fed's Perennially Faulty Forecasts - fomc projections

 

Note: Less than 6 months into the year, the Fed has pivoted from hawkish (December) to dovish (March/April) to hawkish (May) and will now pivot back to dovish again. So the question now is what does that do to the dot plots?

 

Well, the market is guessing... 

 

The implied rate hike probability for June has been squashed to 0% today, versus 30% just eleven days ago the time span between which Fed head Janet Yellen flipped back to dovish again.

 

4 Charts: An Appraisal Of The Fed's Perennially Faulty Forecasts - fed funds futures 6 7

 

It's also worth reflecting on the historical market bets for a June rate hike, if only to visually understand the Fed's circuitous pivots from "hawkish to dovish." Six months ago, Fed funds futures put the probability of a June hike at a whopping 68%!

 

4 Charts: An Appraisal Of The Fed's Perennially Faulty Forecasts - fed funds history june

 

There's one key takeaway...

 

The risk to investors is believing the Fed's serially-overoptimistic forecasts.


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