Track Record of FOMC's Projections
Projections and Decisions of FOMC
14 December 2016 (this year):
FOMC projected it would raise its key federal funds interest-rate target by a quarter percentage point three times in 2017, which was one more hike than in its previous forecast announced in late September.
=> This projection has caused bond investors to be extremely worried.
Let us analyse if FOMC's past projection of interest rate hike has become a reality:
17 December 2015 (one year ago):
The Federal Open Market Committee unanimously voted to set the new target range for the federal funds rate at 0.25 percent to 0.5 percent, up from zero to 0.25 percent.
Policy makers separately forecast an appropriate rate of 1.375 percent at the end of 2016, the same as September, implying four quarter-point increases in the target range next year, based on the median number from 17 officials.
Link: https://www.bloomberg.com/news/articles/2015-12-16/fed-ends-zero-rate-era-signals-4-quarter-point-2016-increases
6 January 2016:
Federal Reserve Vice Chairman Stanley Fischer said that four rate hikes by the U.S. central bank this year is close to his expectations.
Link: https://www.google.com.sg/amp/mobile.reuters.com/article/amp/idUSKBN0UK1OT20160106?client=ms-android-oppo
March 2016:
March interest rate hike was shelved after steep slide in global market at the beginning of the year over concerns about China and plunge in oil price. The market had further concern that plunge in oil price will affect high yield bond market.
June 2016:
June interest rate hike was again postponed as market worried about UK referendum.
December 2016:
Finally Fed raised rate on 14 December 2016.
=> That make it 1 rate hike instead of projected 4 rate hikes earlier in the year.
Conclusion:
What 2016 has taught us is that Fed can make projections, but unforeseen events may intercede those projections.
According to Fed Funds futures, the probability of 3 quarter rate hikes by December 2017 is only 27.6%.
14 December 2016 (this year):
FOMC projected it would raise its key federal funds interest-rate target by a quarter percentage point three times in 2017, which was one more hike than in its previous forecast announced in late September.
=> This projection has caused bond investors to be extremely worried.
Let us analyse if FOMC's past projection of interest rate hike has become a reality:
17 December 2015 (one year ago):
The Federal Open Market Committee unanimously voted to set the new target range for the federal funds rate at 0.25 percent to 0.5 percent, up from zero to 0.25 percent.
Policy makers separately forecast an appropriate rate of 1.375 percent at the end of 2016, the same as September, implying four quarter-point increases in the target range next year, based on the median number from 17 officials.
Link: https://www.bloomberg.com/news/articles/2015-12-16/fed-ends-zero-rate-era-signals-4-quarter-point-2016-increases
6 January 2016:
Federal Reserve Vice Chairman Stanley Fischer said that four rate hikes by the U.S. central bank this year is close to his expectations.
Link: https://www.google.com.sg/amp/mobile.reuters.com/article/amp/idUSKBN0UK1OT20160106?client=ms-android-oppo
March 2016:
March interest rate hike was shelved after steep slide in global market at the beginning of the year over concerns about China and plunge in oil price. The market had further concern that plunge in oil price will affect high yield bond market.
June 2016:
June interest rate hike was again postponed as market worried about UK referendum.
December 2016:
Finally Fed raised rate on 14 December 2016.
=> That make it 1 rate hike instead of projected 4 rate hikes earlier in the year.
Conclusion:
What 2016 has taught us is that Fed can make projections, but unforeseen events may intercede those projections.
According to Fed Funds futures, the probability of 3 quarter rate hikes by December 2017 is only 27.6%.
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