The Market is TERRIBLE at forecasting Fed Rate Hikes

Mar 26, 2021 | Nick Scholte


Fed Chair Jerome Powell has taken pains to emphasize that the Fed will remain patient when raising rates. This, combined with the accompanying chart, has me focused on the looming second half recovery and positioning client portfolios accordingly.

To my clients:

It was a mixed week for North American stock markets with the Canadian TSX down 0.5%; the U.S. Dow Jones Index up 1.4%; and the U.S. S&P 500 up 1.6%.

Interest rates and the anticipated policy actions of the U.S. Federal Reserve have been the dominant theme moving markets the past several weeks. In a nutshell, investors are nervously anticipating higher interest rates, and there has been heightened market volatility as a result. However, in addition to the “New Era at the Federal Reserve” that I wrote about last week where Chairman Jerome Powell clearly messaged that the Fed will be patient (see here), it’s also the case that markets are TERRIBLE at anticipating the future direction of interest rates. Since 2008, markets have consistently priced in a more aggressive path of Fed rate hikes than what ultimately happened, underestimating how patient monetary policymakers can be in lifting borrowing costs from zero. For example, in 2008 traders already saw several hikes in the following couple years, even though it ultimately took Fed officials until 2015 to tighten. The chart below (courtesy of Bloomberg further citing research from JP Morgan) highlights the consistency of these erroneous expectations. The bold white line is the actual interest rate level set by the Fed, while the shorter wispier lines show the 2-year market expectation for rates for every month going back to 2008. This is one of the most interesting and enlightening charts I’ve seen in many years.

This chart further encourages me to look through the market noise of the past many weeks and remain focused upon the economic recovery that is set to strengthen materially in the second half of 2021. Further equity additions to client portfolios are imminent. As part of this process, I’ll take the opportunity to rebalance individual positions. This might mean there will be slight reductions in certain individual positions but, overall, the total equity (i.e. stock) weightings will be increased.

That’s it for this week. All the best and stay safe,


Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager

Scholte Wealth Management
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