The Federal Reserve is forecasting a slowing US economy to sub 2% by 2020. Core inflation is sinking away from the 2% target. The Fed Funds Futures market is eyeing declining rates in the future. Trump wants rate cuts now, Chairman Powell is patient. Dot Plots signals rising rates, implied probabilities from Fed Funds futures signals declining rates. In other words, helter skelter monetary policy.
(Bloomberg) — Federal Reserve policy makers may decide Wednesday that falling inflation reinforces a message of caution on interest-rate moves, rather than bowing to President Donald Trump’s demands for drastic action to boost the U.S. economy.
The Federal Open Market Committee is all but certain to hold interest rates steady at the close of a two-day meeting in Washington and repeat in its policy statement at 2 p.m. that the central bank will be patient in making future moves.
Money markets see lower rates in the year ahead.
Policy makers are confronting a puzzling outlook that could push some FOMC participants to look to easing in the future and others to tighten. Inflation has weakened this year, falling further from the committee’s 2 percent target, while growth accelerated in the first quarter after early signs that it would slow. The upshot will likely be a prolonged pause, with a few talking of when to cut.
You can see the problem in the following chart. Core inflation (white line) is below the Fed Funds Target Rate UB (dashed yellow line) and both LIBOR 1 month and SOFR. Just like it was in 2008.
I wonder if the FOMC noticed Redfin’s house price chart showing -0.1% growth YoY.
You can see why Trump is pushing a rate cut. Even The Fed is forecasting an economic slowdown over the next several years. Seeing that sub-2% real GDP growth in 2013 around the corner, Bernanke unleashed QE3, the third and largest purchase of US Treasury Notes and Agency MBS.
While a change in the Fed Funds Target rate is not on the table, perhaps more discussion on the self-dissolving balance sheet is in order.
Oddly, The Fed’s dot plot shows increasing Fed Funds rates (despite their own forecast of a slowing economy). Look at the green line (FOMC Dots Median).
while the future implied probability of the Fed Funds rate is DOWNWARD sloping (orange line).
New Zealand, Australia, India and Japan join the US, Canada and the Eurozone with negative WIRP probabilities. Mexico is going the opposite direction.
Alternatively, The Fed’s dot plot forecast seems to be out of line with Fed Funds implied probabilities. A Beatles song that is appropriate: Helter Skelter.