Chart of the Month – August 2018

The Fed is Miscalculating!!

Our chart(s) of the month, this month comes to us courtesy of Capital Economics (N.A.) Ltd.

Since May of this year there has been a shift in some opinions that the Fed Funds rate will continue to rise throughout 2019 and into 2020. By viewing the chart above one can see that the market now believes that the Fed Funds rate will rise to December 2019 and then start to decline. This is in contrast to the market view of May that the Fed Funds Rate would continue rising through 2020. These projections are based on actual traded markets (US futures markets). However, when one looks at the chart below one sees that the prognosticators, usually economists that are polled by the Wall Street Journal, are predicting that rates will continue rising until 2020 and that the Federal Reserve itself is even more hawkish, expecting rates to rise through 2020.

This has major implications for the economy and by extension to the stock market. It is well known that most bull markets are killed by rising interest rates, which in the short end are controlled by the Federal Reserve. As one can see the most bearish of the calls is from Capital Economics who see rates falling midway through 2019. They state “Our view is that both markets and the consensus are still underestimating just how quickly the economy is likely to lose momentum next year, as the fiscal boost fades and monetary tightening bites”
The risk is that an aggressive Federal Reserve continues to raise rates after the economy has slowed and thus will bring about a recession.