Don’t Be So Sure the Fed Is Cutting Rates
Chief economists at two Wall Street houses are questioning the conventional wisdom that the Federal Reserve is about to start cutting short-term interest rates to sustain the economic expansion. They make a good case that traders may have gotten ahead of themselves.
Deutsche Bank Chief Economist Torsten Slok and his team created this chart, which is appropriately headlined, “The market is almost always wrong about what the Fed will do.” The red line represents the path of the federal funds rate—i.e., the interest rate on overnight loans of bank reserves that the Fed controls. The dotted lines represent what traders in the futures market thought was going to happen to the funds rate. From 2001 to 2004, traders expected the funds rate to rise, but it fell. From 2004 to 2007, they expected it to flatten out, but it rose. From 2009 to 2016, they expected it to rise, but it stayed flat. Et cetera: Wrong every time.
The blue line reflects the latest betting by the futures market. Going by the pricing of futures contracts, the market expectation is for the top end of the funds rate range to fall from its current 2.5% to 1.5% by 2021. (As of June 10, the market was reflecting a 98.1% chance of some kind of cut by the end of 2019.) Slok’s snide comment in the chart, also in blue: “Why would the market be right today?”
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