1/7
The orange line shows the Fed "dot chart" projects three funds rate cuts in 2024.
The blue line shows the market has fully priced in six rate cuts.
What is the track record of the market's pricing?
🧵
The orange line shows the Fed "dot chart" projects three funds rate cuts in 2024.
The blue line shows the market has fully priced in six rate cuts.
What is the track record of the market's pricing?
🧵
2/7
First, the January 31st, 2024, meeting has a 14% probability of a cut and has never been close to 50%.
No move is solidly priced in for this meeting.
First, the January 31st, 2024, meeting has a 14% probability of a cut and has never been close to 50%.
No move is solidly priced in for this meeting.
3/7
This chart covers the 46 meetings that Powell has been the Chairman.
The Jan 31 meeting is 27 days away; the market prices the outcome of the meeting correctly 76% of the time.
This pricing rises to 100% correct ten trading days (or two weeks) before the FOMC meeting.
This chart covers the 46 meetings that Powell has been the Chairman.
The Jan 31 meeting is 27 days away; the market prices the outcome of the meeting correctly 76% of the time.
This pricing rises to 100% correct ten trading days (or two weeks) before the FOMC meeting.
4/7
But when looking out over several meetings, the track record of the market correctly pricing the outcome of these subsequent meetings is not good.
A coin flip might produce a better track record.
But when looking out over several meetings, the track record of the market correctly pricing the outcome of these subsequent meetings is not good.
A coin flip might produce a better track record.
5/7
These charts should be this way!
If the Fed wants forward guidance, the market should have a high probability of pricing its outcome correctly when the meeting is a few weeks or a month away.
Otherwise, forward guidance has a real problem.
These charts should be this way!
If the Fed wants forward guidance, the market should have a high probability of pricing its outcome correctly when the meeting is a few weeks or a month away.
Otherwise, forward guidance has a real problem.
6/7
But it should have a POOR TRACK RECORD when the meeting is months or a year away.
Things change, and "stuff" happens that no one can predict. The market will adjust when it does.
It is important to know what the market is pricing. So, these charts are helpful.
But it should have a POOR TRACK RECORD when the meeting is months or a year away.
Things change, and "stuff" happens that no one can predict. The market will adjust when it does.
It is important to know what the market is pricing. So, these charts are helpful.
7/7
Six rate cuts for the next year should be, by definition, wrong.
Maybe it is 10 cuts (a recession), maybe it is zero (no landing and sticky inflation).
Time will tell.
Six rate cuts for the next year should be, by definition, wrong.
Maybe it is 10 cuts (a recession), maybe it is zero (no landing and sticky inflation).
Time will tell.
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