History shows even the Fed can’t really predict what it does with interest rates a year out

For a second day in a row, financial markets continued to absorb what’s being described as the Great Monetary Pivot, in which the world’s perhaps most powerful central bank looks ready to start cutting interest rates from 22-year highs starting in 2024.However, history shows that Federal Reserve policymakers may be just as much in the dark as anyone else as to what they’ll actually end up doing beyond a three-month period. From 2012-2023, the Fed’s interest-rate projections, known collectively as the dot plot, have been only spot-on in predicting where the fed funds rate target would be during a relatively short period of time, according to an analysis done by Glenmede Investment Management in Philadelphia. The Fed’s dot plot has been less accurate when gauging where borrowing costs will end up the following year and is “astoundingly” wrong when looking two years out, according to the work done by portfolio manager Alex Atanasiu.

Atanasiu used the month of September as the starting point for the analysis since the Fed’s dot plot reflects the level of interest rates that officials think will be appropriate by year-end for each of the next handful of years. The conclusion was that the dots were accurate in only predicting where interest rates would be in December of the same year because policymakers were unlikely to change course in a major way during such a short period of time.At the center of the financial market’s reaction to the Fed’s surprisingly dovis …

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