Updated April 10, 2016 12:39 p.m. ET
The Federal Reserve doesn’t expect to do much with rates this year, but investors expect it to do less. That could spell trouble.
Projections released after last month’s Fed meeting showed the median expectation among policy makers would raise rates by a half point this year—just two quarter-point increases. Speeches Fed meeting participants have given since and the March meeting minutes have reinforced that message. But recent market action suggests a belief that even one rate increase this year is iffy. Federal-funds futures put the chances of a single increase by the Fed’s December meeting at about 60%. Odds of a rate increase by June are around 15%.
Fed officials aren’t comfortable with this disconnect. Last week, Federal Reserve Bank of Boston President Eric Rosengren—one of the most dovish members of the Fed’s policy-setting committee—said he was surprised futures-implied rate forecasts were so low. If his forecast for moderate economic growth holds, he thinks the Fed ought to raise rates faster than futures suggest.
Over the past several years, lower rate projections embedded in futures have tended to be a better guide to Fed policy. But the futures haven’t always gotten it right. Last October, they ascribed scant odds to the Fed raising in December. One reason the end of last year was so trying for markets: They had to readjust to the reality a December rate increase was, in fact, coming.
Sometimes, investors need to be careful about getting too comfortable with the idea the message of the markets is true.
Write to Justin Lahart at [email protected]