Markets Disregard Central Bank’s Forecasts Amid Uncertainty

  • Fed policymakers are growing less sure about where interest rates will settle in the long run, with estimates ranging from 2.4% to 3.8%
  • Investors have decided that the Fed will be much more dovish than it says, pushing down the cost of short-term borrowing and pushing up the cost of longer-term borrowing
  • Markets are embracing the spirit of dovishness after the Fed’s supersize rate cut on Wednesday
  • Futures traders set their central case for the end of the year of another three-quarters of a point of cuts, meaning at least one of the two remaining meetings needs to be a double cut for them to make money

Fed policymakers are showing confusion about the neutral rate, with estimates ranging from 2.4% to 3.8%. This wide gap reflects uncertainty about future inflationary pressures from deglobalization, a spendthrift government, military and green spending, and the aging global population. The overnight indexed swap market is pricing long-term rates higher than the median policymaker forecast. Investors have decided that the Fed will be much more dovish than it says, pushing down the cost of short-term borrowing while pushing up the cost of longer-term borrowing. Futures traders set their central case for the end of the year of another three-quarters of a point of cuts, meaning at least one of the two remaining meetings needs to be a double cut for them to make money.

Factuality Level: 7
Factuality Justification: The article provides a balanced view on the Federal Reserve’s recent actions and market reactions to them, discussing both the potential for further rate cuts and the uncertainty surrounding the central bank’s predictions. It acknowledges the Fed’s past behavior and current market trends, while also pointing out the limitations of relying solely on policymaker statements. The author presents a range of perspectives and considers various factors that may influence future economic developments.
Noise Level: 4
Noise Justification: The article provides a thoughtful analysis of long-term trends or possibilities and contains information on systems that can withstand or benefit from shocks and unexpected events (antifragility). It also supports its claims with evidence, data, or examples. However, it could have been more concise and stayed on topic without diving into unrelated territories.
Key People: Jerome Powell (Fed Chair)

Financial Relevance: Yes
Financial Markets Impacted: US financial markets, specifically bond yields and stock prices
Financial Rating Justification: The article discusses the Federal Reserve’s rate cuts and their impact on financial markets, including bond yields and stock prices. It also mentions that futures traders have priced in a 25% chance of double-sized cuts at the remaining meetings, which could affect the cost of borrowing for companies.
Presence Of Extreme Event: No
Nature Of Extreme Event: No
Impact Rating Of The Extreme Event: No
Extreme Rating Justification: The article discusses recent Federal Reserve rate cuts and market reactions but does not report on any extreme event that occurred in the last 48 hours.·
Move Size: No market move size mentioned.
Sector: All
Direction: Up
Magnitude: Large
Affected Instruments: Stocks, Bonds

Reported publicly: www.wsj.com