The market and the FOMC have different visions for the future of interest rates.
A paper from the Federal Reserve Bank of San Francisco released on Monday by Jens Christensen and Simon Kwan, research economists at the SF Fed, notes this divergence.
The split is captured in these two charts highlighted by Christensen and Kwan: the first showing the FOMC’s expectations for interest rates, the second showing the market’s.
Not only does the market expect lower interest rates over the long-term, but an additional observation is that market expectations are within a tighter range than the FOMC’s, indicating that the public is less uncertain about the future path of interest rates than the Fed.
Christensen and Kwan pull their Fed expectations from the FOMC’s latest summary of economic projections, which are merely expectations from FOMC participants, and not necessarily prescriptions for the future path of Fed policy.
However, the important split isn’t just the expected interest rate, but the variability in how we get to these rates.
The key observation from Christensen and Kwan is that, “the public might not give enough weight to how dependent the central bank’s guidance is on both current and incoming data. Thus, the public could underestimate the conditionality and uncertainty of interest rate projections.”
It’s been eight years since the Fed raised interest rates, and after the Fed finishes its quantitative easing program next month, the countdown will be on the first interest rate hike.
And it’s pretty clear that no one really knows what happens next.