Fed Funds Rate Apt to Remain Tame No Matter Which Outlook is Used
It's been a while since our last look at the market's outlook for interest rates (as measured by the Fed Funds rate futures market). There's just been little need to go through the exercise. Janet Yellen said late last year to look for a handful of interest rate increases, and dished out the first of them in December. Although a few economic red flags have waved in the meantime, she seems intent to stay the course.
The market itself, however, has somewhat re-written -- well, shifted -- the 2016 and 2017 roadmap for the Fed Funds rate. The shift, broadly speaking, was downward, and to the right of the graph.
It's a sign that traders don't expect the Fed to be as aggressive with Fed Funds rate increase as suggested late last year, even though Janet Yellen hasn't said much to suggest this would be the case. In fact, the Federal Reserve's voting members generally agree the Fed Funds rate will be higher, and sooner, than the market does... or they did, anyway. This is the FOMC's so-called dot plot as of the end of last year. It doesn't reflect any changes that may have materialized in the meantime, but as was noted, the Fed seems intent on staying its course (and though concerns have popped up in the meantime, none of them are actually economic alarm bells).
The likely outcome, as usual, is somewhere in the middle of the two extremes. That is, rates aren't apt to push as high as the Federal Reserve's members think, or as fast, but they're likely to move higher and faster than the market's current outlook. Either way, the outlook isn't a debilitating one for the economy. Indeed, investors as well as the Fed may be surprised how slightly higher rates might actually lift the economy by virtue of better interest payments on loans, and stronger dividends.
The next official update of the Fed's dot-plot comes later this month.