The Fed's Rising Expectations for Interest Rates

Given the events of this past week and the general dousing the market has taken so far this month, this latest AAII update addressing the Fed's interest rate strategy seemed particularly relevant and timely.  Enjoy and enjoy the beautiful weekend.  The heat is coming.  

Investor Update THURSDAY, JUNE 16, 2022

Dear Member,

The last time I recall writing about the Federal Open Market Committee's (FOMC) forecasts was in 2019. Yesterday's 75-basis-point (0.75%) increase—the first triple quarter-point hike since 1994—warrants an updated discussion. The individual forecasts of committee members are made public four times a year. Yesterday was one of those times. You can see the individual forecasts plotted on a chart as individual dots. Hence the references to the “dot plot.”

The dot plot currently shows a median expectation for the federal funds rate to be 3.4% this year and 3.8% next year, versus a range of 0.0% to 0.25% this past January. The target rate is projected to pull back to 3.4% in 2024. As you can see on the chart to the right, there is quite a bit of variance between the low and high forecast for 2023 and even a bigger variance for 2024. When we look specifically at the past six months, the magnitude of the shift in expectations can be seen. Here are the median 2022 projections for the federal funds rate from FOMC members: December 2021: 0.9%; March 2022: 1.9%; June 2022: 3.4%.

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