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2021-11-15
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Market Bets on a Fed Interest-Rate Mistake
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But the market is also saying that rates won’t go as high as the Fed eventually thinks they will.</p>\n<p>Say what?</p>\n<p>In September, when Fed policy makers last offered projections on where they thought interest rates would go, they were split on what would happen next year: Half thought they would be leaving their target range on overnight rates near zero. Most of the rest thought they would raise the range by a quarter of a percentage point. Judging by Fed Chairman Jerome Powell’s remarks following the November Fed meeting, more policy makers might now be leaning toward a single, quarter-point increase than before.</p>\n<p>Interest-rate futures are saying something different. They now imply the odds of the Fed raising its target range by at least a half point by the end of next year at 83%, according to CME Group calculations. Following the Fed’s September meeting, the odds of that happening were just 22%. Moreover, the futures now put the odds of the Fed raising rates by three-quarters of a point or more at 54%.</p>\n<p>The change in the market’s rate odds came about as it became clear that the supply-chain and labor issues that have been pushing inflation higher were proving more persistent than many forecasters had hoped. One interpretation is that, despite the Fed’s view that much of the recent rise in inflation will end up being transitory, investors in the rates market believe that prices will keep heading higher, that the labor market will continue to tighten and that the Fed will raise rates more than it expects.</p>\n<p>By the final quarter of 2023, market pricing suggests overnight rates will average about 1.4%, according toa Federal Reserve Bank of Atlanta model, whereas the median projection among Fed policy makers has them finishing the year at 1%.</p>\n<p>But after that, the script switches. Long-term interest rates, which are supposed to reflect investor forecasts of what overnight rates will average over the years, remain low, with the 10-year Treasury lately yielding 1.58%.A Federal Reserve Bank of San Francisco modelbased off Treasury yields and estimates of “term premia—the fudge factors investors build into Treasury prices as insurance against the risk their rate forecasts are wrong—puts overnight rates at around 1.4% at the end of 2024 and remaining around there through 2031.</p>\n<p>By contrast, Fed policy makers project their target on overnight rates will rise to 1.75% at the end of 2024. And over the longer haul they think it will rise to 2.5%.</p>\n<p>One interpretation of market pricing is that the Fed will raise rates in response to a burst of inflation that proves temporary, hamstringing the economy. As a result, the Fed will fall short of employment and long-term inflation goals and will never get rates to where it thinks they ought to be in a well-functioning economy. Put otherwise, the market thinks that Fed policy makers should stick with their projections and raise rates slowly. But the market also reckons the Fed will make a mistake and raise rates too quickly.</p>\n<p>If that seems far-fetched, it is important to remember the influence Fed policy expectations have over rates markets is hardly absolute. All sorts of factors affect long-term Treasury yields, including their levels relative to other countries’ bond yields, hedging needs and the general availability of places to safely park money over the long haul. Short-term interest-rate futures can over-adjust to changes in expectations as investors get flushed out of positions.</p>\n<p>The market might be smarter than any one forecaster or the Federal Reserve when it comes to where rates are going. Unfortunately, it isn’t easy figuring out what the market is trying to say.</p>","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Market Bets on a Fed Interest-Rate Mistake</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nMarket Bets on a Fed Interest-Rate Mistake\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-11-15 20:50 GMT+8 <a href=https://www.wsj.com/articles/market-bets-on-a-fed-interest-rate-mistake-11636977780?siteid=yhoof2><strong>Wall Street Journal</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The market is saying that the Federal Reserve is going to be raising rates sooner and faster than the central bank itself thinks it will. But the market is also saying that rates won’t go as high as ...</p>\n\n<a href=\"https://www.wsj.com/articles/market-bets-on-a-fed-interest-rate-mistake-11636977780?siteid=yhoof2\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{},"source_url":"https://www.wsj.com/articles/market-bets-on-a-fed-interest-rate-mistake-11636977780?siteid=yhoof2","is_english":true,"share_image_url":"https://static.laohu8.com/e9f99090a1c2ed51c021029395664489","article_id":"1129444395","content_text":"The market is saying that the Federal Reserve is going to be raising rates sooner and faster than the central bank itself thinks it will. But the market is also saying that rates won’t go as high as the Fed eventually thinks they will.\nSay what?\nIn September, when Fed policy makers last offered projections on where they thought interest rates would go, they were split on what would happen next year: Half thought they would be leaving their target range on overnight rates near zero. Most of the rest thought they would raise the range by a quarter of a percentage point. Judging by Fed Chairman Jerome Powell’s remarks following the November Fed meeting, more policy makers might now be leaning toward a single, quarter-point increase than before.\nInterest-rate futures are saying something different. They now imply the odds of the Fed raising its target range by at least a half point by the end of next year at 83%, according to CME Group calculations. Following the Fed’s September meeting, the odds of that happening were just 22%. Moreover, the futures now put the odds of the Fed raising rates by three-quarters of a point or more at 54%.\nThe change in the market’s rate odds came about as it became clear that the supply-chain and labor issues that have been pushing inflation higher were proving more persistent than many forecasters had hoped. One interpretation is that, despite the Fed’s view that much of the recent rise in inflation will end up being transitory, investors in the rates market believe that prices will keep heading higher, that the labor market will continue to tighten and that the Fed will raise rates more than it expects.\nBy the final quarter of 2023, market pricing suggests overnight rates will average about 1.4%, according toa Federal Reserve Bank of Atlanta model, whereas the median projection among Fed policy makers has them finishing the year at 1%.\nBut after that, the script switches. Long-term interest rates, which are supposed to reflect investor forecasts of what overnight rates will average over the years, remain low, with the 10-year Treasury lately yielding 1.58%.A Federal Reserve Bank of San Francisco modelbased off Treasury yields and estimates of “term premia—the fudge factors investors build into Treasury prices as insurance against the risk their rate forecasts are wrong—puts overnight rates at around 1.4% at the end of 2024 and remaining around there through 2031.\nBy contrast, Fed policy makers project their target on overnight rates will rise to 1.75% at the end of 2024. And over the longer haul they think it will rise to 2.5%.\nOne interpretation of market pricing is that the Fed will raise rates in response to a burst of inflation that proves temporary, hamstringing the economy. As a result, the Fed will fall short of employment and long-term inflation goals and will never get rates to where it thinks they ought to be in a well-functioning economy. Put otherwise, the market thinks that Fed policy makers should stick with their projections and raise rates slowly. But the market also reckons the Fed will make a mistake and raise rates too quickly.\nIf that seems far-fetched, it is important to remember the influence Fed policy expectations have over rates markets is hardly absolute. All sorts of factors affect long-term Treasury yields, including their levels relative to other countries’ bond yields, hedging needs and the general availability of places to safely park money over the long haul. Short-term interest-rate futures can over-adjust to changes in expectations as investors get flushed out of positions.\nThe market might be smarter than any one forecaster or the Federal Reserve when it comes to where rates are going. 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