Tuesday, September 21, 2010

Market expectations are dismal

As we wait for the Fed to tell us that not much has changed and they expect to keep rates low for a long time, I thought it would be interesting to show what market expectations are for future Fed actions. This chart shows the expected Fed funds rate one year in the future (using the one-year forward futures contract on Fed funds). Today the expected rate for Sep. '11 is 0.3%, which means that the market is not really expecting any chance of a tightening in monetary policy for the next year.

To my mind, this is characteristic of a market that has very little hope for an economic recovery, and very little concern about rising inflation. It is also the least optimistic view of the future that we have seen since before the recent recession started. This market is braced for bad news. In the absence of bad news, risky asset prices would likely rally.

UPDATE: With the FOMC's statement suggesting that the Fed continues to believe that the economy is on a slow path to recovery (i.e., the Fed is not panicking), equity prices have rallied.


Victor said...

where do you get these charts?

Scott Grannis said...


Benjamin said...

The FOMC kept the door open for quantitative easing...and we are trending to deflation...so, we can hope for a Fed-boost in the future.
Market is rallying, although any day's rally can be ascribed to anything....

Benjamin said...

Here is how the FT played it..

Fed ready to aid US economy
By Robin Harding in Washington

Published: September 21 2010 19:34 | Last updated: September 21 2010 19:34

The Federal Reserve took no action at its September meeting but sent a signal that it may soon restart large purchases of Treasury bonds by changing its policy statement.

After its meeting on Tuesday, the rate-setting Federal Open Market Committee said that it “will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

John said...

I did not see anything new in the statement. The time to watch for action will be after the election. I really do not have a good feel for what they are most likely to do...a good case can be made either way.

The market is due a rest/consolidation/pullback. Nasdaq is up 9 straight days. The S&P 500 has moved above the June and August highs. It appears to me it will test the April highs within a few weeks and probably exceed them by the end of the year. Many of the real bargains are gone. They were everywhere in May when everyone thought the Euro was going to collapse. Now one must look carefully to find them. They are there though.

Benjamin said...

I sense the "monetary bulls" are gathering strength. The more people review the crappy road that Japan took, and the terrible effects there of deflation, the more people will want the Fed to act.
Zuckerman's piece today in the WSJ op-ed page is chilling. We simply have to get the housing market re-started.
I know, as a nation, we overinvested in housing. But, to paraphrase, sometimes you have to go to town with the economy you have, not the one want.

John said...


I believe more market participants are thinking the Fed will act should the economic numbers get worse (or maybe even fail to improve as expected). One thing the equity markets have going for them is that many S&P 500 companies have overseas operations in regions where economic growth is good. Earnings are continuing to grow despite a lackluster US economy.

It seems like I recall Scott posting a chart showing the degree the US economy is linked to non US economies and I believe I recall the correlation has increased significantly over the last couple of decades. Maybe the economic engine in the current global expansion will be the global economies ex the US, Europe, and Japan.