Last time the Fed raised rates, the market was wrong.
On Twitter on Thursday, the FT’s Robin Wigglesworth tweeted the following chart, showing the market’s expectations for the Fed during the last cycle where the Fed was raising rates from 2004-2006. Every step of the way, the market thought the Fed would raise rates less than they actually did, and the market was wrong all the way.
Right now, the market isn’t really expecting the Fed to do anything this year.
This chart out of Jeff Gundlach’s presentation on Tuesday shows that the only month in which the market expects there is even a better-than-50%-chance of a Fed rate hike this year is December.
June has been totally priced out and only a small minority think the Fed will move in September.
And even Gundlach himself said on Tuesday that he thinks there is a less than 50% chance the Fed moves this year.
And so in short, the market looks at the Fed’s behaviour over the last 7 years and sees a central bank that hasn’t done anything with interest rates and is going to take the other side of “Fed action” whenever possible.
Right now, the conversation surrounding the Fed is that given the economic soft patch we saw to start the year, the Fed will not be quick to raise interest rates, despite a labour market that appears to be robust.
In short, it seems like things are coming together for the Fed to raise rates — and some have argued the Fed has had a chance to do this for some time — but there are still going to be folks pointing to the market’s positioning and arguing that this will stop the Fed from acting.
A quick review 0f history, however, makes clear that this is just not how it goes.