Gap in rate expectations signals volatility ahead?
This week’s chart looks at the huge gap between the Fed’s and investors’ rate cut expectations today, and why that could signal volatility ahead.
June 21, 2019 | 1 minute read
The Fed held rates steady this week, as largely expected, while
clearly opening the door to a rate cut in July. Immediately following
the meeting, 2-year yields fell approximately 14 bps in anticipation of
lower market rates while the 10-year moved below 2% on Thursday.1
According to the Fed’s dot plot, eight Fed governors forecast at
least one rate cut for this year. But the median Fed forecast for rates
in 2019 held steady at 2.4%.2 Within this context, it’s
important to remember that market expectations for the Fed funds rate
have been consistently lower than the Fed’s own projections.
As the chart shows, this was true when investors expected rates
to rise in late 2017 and has been equally true in today’s environment.
In fact, investors currently expect the target Fed funds rate to finish
2019 at approximately 1.75%, which implies more than three rate cuts
within the next six months.1
We’ve seen since Q4 2018 how much Fed expectations can impact
market performance and drive volatility. Since December 2017, the
divergence between market expectations and Fed projections has never
been wider, which creates the potential for significant volatility
should the size of this rift persist.
Private credit has increasingly become the preferred source of financing for PE sponsors, with direct lending volume jumping 60% over last year’s level.
