Chart of the week

A wide disconnect between investors and the Fed

Markets expect the Fed to be much less hawkish than Fed policymakers do. This week’s chart looks at how the disconnect could drive volatility.

August 19, 2022 | 2 minute read

Rate expectations: Market vs. Fed

Source: Bloomberg Finance, L.P., and U.S. Federal Reserve. As of August 17, 2022. Long-run Fed rate expectations are represented by the 3-month Eurodollar futures curve. 

  • Following an extraordinarily volatile first half of the year, markets have staged a significant recovery, rising approximately 16% off their low on June 16.1 Among other factors, the rally has been driven by investors’ bet that the Fed might be too successful in slowing economic growth.
  • Market expectations imply that the Fed will continue raising rates through December 2022 and then quickly adjust, easing rates over the next two years nearly almost as quickly as it hiked. Markets anticipate policymakers will ultimately bring the Fed funds rate back to approximately just 2.8% by December 2024.2
  • For their part, Fed policymakers vigorously disagree with the market’s expectations, noting at their July meeting that it will likely be appropriate to keep rates at higher levels for some time.
  • Earlier in August, San Francisco Fed President Daly, often characterized as one of the more-dovish Fed Chairs, emphasized that inflation is the most important economic risk today and that the Fed’s job [reducing inflation] is “far from done.”3
  • Clearly, markets and policymakers are operating under very different assumptions and only time will tell which path the Fed takes. In the meantime, however, investors would be wise to remain flexible in their investment strategies, seeking out those that have the potential to withstand, or benefit from, volatility. 

  • S&P 500 Index, as of August 17, 2022

  • Bloomberg Finance, L.P., and U.S. Federal Reserve. As of August 17, 2022. Long-run Fed rate expectations are represented by the 3-month Eurodollar futures curve.

  • CBS News, Face the Nation, August 7, 2022.

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