FOMC – Missing the point?
Three months ago when the Federal Open Market Committee last updated its forecasts within its Summary of Economic Projections (SEP), the world’s press chose to run with headlines stating that the Fed was signaling a hastier timetable for rate increases. Not us, per our June 18 piece entitled FOMC Policy Statement and Summary of Economic Projections.
On that day the yield on the 10-year Treasury note shed 6 basis points to close at 2.58%. We chose to assess the softening in the longer-run predictions for the fed funds rate cost of borrowing. For example, the consensus within the FOMC had dropped their longer-run equilibrium view as to the ultimate elevation point for the fed funds rate over coming years. Granted, the drop was by one-quarter point to a rate of 3.75%, but its ramifications gradually seeped through the market over the ensuing three months. With a deteriorating geopolitical backdrop, rising sanctions and slowing exports, government bond yields fell to 2.30%. And domestically, Janet Yellen had elaborated further on implications of the pace of labor market recovery, while in the background, wage and inflation pressures have largely remained absent.
Our prompt assertion in June that the forward view within the SEP was more important than media headlines pointing to an imminent policy tightening were lost even more recently when the San Francisco Fed posted its paper on public expectations of policy. The paper compared an array of survey measures and expectations to the upper and lower percentiles contained within the SEP. The real point the San Francisco researchers made was that the public was likely underestimating the conditions under which the Fed might have to change its view over whether the data should hasten, or not, its path for tightening.
As the taper process draws to a close, the public is perhaps too calendar-dependent. However, the bond market continued to respond, lifting the 10-year yield by 20 bps to 2.61% in response to the research. It is important to note that while bond traders reacted negatively, as the paper stated that public perceptions lay below the views contained within the SEP, the last major change in perceptions was an adjustment from the Fed – not the public.
Chart – Maybe the argument is not when, but how high the fed funds rate will ultimately go?