The Federal Reserve speculates that it will successfully raise interest rates over four times more before the conclusion of the year 2016; however, the traders in the financial market are not buying it. With traders expecting a few — probably two more — spikes in the coming year, the Federal Reserve is sure doing a good job at making this whole statement look rather unbelievable, which could lead to the complications for the United States economy by next year and thereafter.
The Federal Reserve, due to its empty promises of increased interest rates, lost some of its credibility over the past five years, thanks to their skill of backing down when stronger growth failed to yield and harvest whatsoever. Traders made a handful of easy gains by betting against the central bank, which technically defies an old maxim by Wall Street, “Don’t fight the Fed.”
It is going to take a lot for the Federal Reserve chairman, Janet Yellen, and other policymakers to convince the financial markets that they mean business this time.
The Federal Open Market Committee increased its goal for the federal funds rate to a range of 0.25 percent to 0.5 percent over from a range that laid at zero, which has been its favorite spot since December 2008. This could only mean that the Fed rate setters are feeling that the United States recovery that began in June 2009 is at a good place now, with enough strength to be taken off the monetary life support. Chairman Yellen gave the impression at a press conference, stating “The underlying health of the U.S. economy seems to be quite sound”.
The periodically released “dot plot” holds the Fed’s own rates expectations. Every single dot in the chart signifies a forecast for Fed funds rate by each member of the FOMC. This panel is made up of individuals in the Federal Reserve Board based in Washington, which currently numbers five, plus the presidents of the 12 regional Federal Reserve Banks. All committee members are requested to make a forecast for the end of each year. However, the identity of the person linked with each dot is left anonymous. The forecast was released on Dec. 16, and according to it the Median FOMC member (the person with a dot in the center of the cluster) made a prediction of Federal funds rate ranging from 1.25 percent to 1.5 percent by the end of 2016, which is tantamount to four hikes, if each quarter is a quarter point. This range is definitely more than what the market expects, as the market is foreseeing the federal funds rate to be somewhat less than 1 percent a year from now, according to Guy LeBas, the chief fixed income strategist at Janney Montgomery Scott. LeBas’s calculations are based on the trade in the extremely active Eurodollar market, which traders use to place bets on U.S. interest rates.
This difference between the Fed and the markets is strictly a matter of perception. As the Fed follow the instruction to pick a single likely range for interest rates, the financial markets spend time analyzing the possibilities of an interest rate and examining what could drag possibilities down.
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