Chart of the week

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.

The chart of the week and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The chart of the week is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such market commentary. The chart of the week should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the chart of the week or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Search our site