Forecasters once again closer to the mark on U.S. rate outlook

March 17, 2016

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All the talk and the drama on trading floors may be how much the Federal Reserve has bowed to the will of financial markets in its surprisingly more cautious tone on interest rates.

But a Reuters poll of 88 economists taken nearly a week before the Federal Open Market Committee’s decision to hold the federal funds rate steady at 0.25 -0.50 percent and signal just two more rate rises this year had already predicted that outcome.

It’s the latest in a series of predictions derived from regular surveys of professional forecasters that have been more steady, consistent and accurate than market pricing in the weeks running up to key policy decisions.

Fed funds March poll

Reuters polls in the run-up to the first interest rate hike in nearly a decade last December had been consistently pointing to that meeting as the most likely choice months ahead of time, but also reflected the nuance behind the decision.

Interest rate futures were once again all over the map.

Fed funds futures chart Dec 2016

It was always going to be a delicate balance this week for the Fed: on the one hand, providing support for those with a more cautious outlook after a tumultuous start to the year on markets; on the other, keeping enough confidence among the optimists that the economy is strong enough to withstand more rate rises later this year.

What hasn’t been delicate is how interest rate futures have swung from pricing in absolutely no moves at all this year back to something looking a lot more like the Fed’s current thinking.

Finding a sober middle ground is never easy to do, in diplomacy or forecasting. But for all of the panic at the start of the year in financial markets that seems to have dissipated as quickly as it began, that is probably not the best place to search for it.

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