One Wall Street economist has a reminder for investors ahead of next week’s Federal Reserve meeting: don’t get too excited about the prospect of interest-rate cuts next year. That is because the market’s perception of what the Fed might do over the months and years ahead is often incorrect — sometimes wildly so. While traders often have a good idea about what the Fed might do at the next meeting, beyond that, it is mostly guesswork.
In his latest note to clients shared with MarketWatch on Friday, Apollo Chief Economist Torsten Slok compared futures-market pricing of expected changes in the Fed’s policy rate target with how the fed-funds rate has actually moved over time.
Sometimes, the market at least gets the directional move right, but traders expectations have been dashed far more often than they have been proven right over the past 15 years. For example, investors were right to start pricing in interest-rate hikes beginning in 2014 when the Fed, at the time led by former chair and current U.S. Treasury Secretary Janet Yellen, started raising borrowing costs for the first time since the 2008 financial crisis. But at least initially, they expected the Fed to act more aggressively than it ultimately did. Between 2009 and 2014, traders repeatedly saw their expectations for a rapid normalization of monetary policy dashed as the Fed kept rates at the zero bound longer than most had expected. Ultimately, the Fed opted to interest raise rates much more slowly and carefully than many traders had expected. Traders were proved wrong again when the Fed, this time under Chair Jerome Powell, started cutting interest rates for the …