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Lonsec   ⟩   News & Insights   ⟩   News   ⟩   Market hopes are still ahead of the Fed
Lukasz de Pourbaix

AuthorLukasz de Pourbaix

TitleChief Investment Officer, Lonsec Investment Solutions

DateMarch 21, 2019

CategoryNews

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The market made its view clear at the end of last year: no more rate hikes. As the US Fed threw its tightening rhetoric into reverse, markets dramatically shifted their expectations for the next interest rate move, with a cut to the funds rate firming as a distinct possibility. As the chart below shows, the probability of a rate cut based on the pricing of December 2019 Fed futures rose to 38% in March, while the probability of a rate increase is effectively zero.

Probability of a Fed funds rate move (December 2019 meeting)


Source: Bloomberg, CME, Lonsec

All that was left was for markets to see if the Fed’s FOMC members had arrived at the party on time. This week’s meeting coincided with the release of the Fed’s updated growth and inflation forecasts, as well the notorious ‘dot plot’, which indicated where individual voting members believe the target rate should move to based on current economic data and their view of monetary policy. As expected, members’ views have changed significantly compared to the last dot plot released in December 2018, as the chart below shows.

Fed dot plot versus previous quarter


Source: Lonsec, FOMC

In particular, the majority of members believe the funds rate should remain where it is at a target range of 2.25–2.50% for the rest of 2019, compared to the previous quarter when only two members saw rates staying where they were. Looking forward to 2020, the dot plot shows the median view is for rates to again remain on hold, although most see rates rising by at least 25 basis points. Even out to 2021, there is a firmer bias towards either no change or a more modest rise.

Interestingly, though, there is nothing pointing to a rate cut, which implies there is still a disconnect between what the Fed is thinking and what markets are hoping for. Over the long run nothing much has changed, although as a famous economist once said, in the long run we’re all dead.

This article has been prepared for licensed financial advisers only. It is not intended for use by retail clients (as defined in the Corporations Act 2001) or any other persons. This information is directed to and prepared for Australian residents only. This information may constitute general advice. It has been prepared without taking account of an investor’s objectives, financial situation or needs and because of that an investor should, before acting on the advice, consider the appropriateness of the advice having regard to their personal objectives, financial situation and needs.

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