This Week's Focus: And the Fed fulfilled the script

This Week's Focus: And the Fed fulfilled the script


On December 14, the Federal Reserve raised the intervention rate of federal funds to the range of 0.50% -0.75% as expected by the market. The statement accompanying the decision and the comments of the press conference attended by its chairwoman Janet Yellen indicate that Committee members expect between two and three additional increases of 0.25% by 2017.

These projections have an impact on the bond market as they cement expectations of how US Treasury interest rates will evolve. Given that both corporate bonds of better or worse quality and the discount of cash flows with which equity is valued are based on the type of American bond, the decision and the expectations that the Fed communicates to the market Have high transcendence

Unreliable expectations

However, the predictive capacity of the FOMC members in the past has not been shown as a very reliable tool for bond markets, which have followed a different course than the Committee's view. The saying of not opposing the Fed (Do not fight the Fed) does not seem to have scared the markets.

In December 2014, when the recovery of the US economy already gave obvious signs of improvement, the Fed committee forecast for December 2016 was about 2.5%, while the current level is 0.75 % Is a prediction error of almost 2%.

About its forecast for September 2015, the error was reduced to just under 1%, placing the forecast of the Dots at 1.5%.

The success of the market

On the other hand, the market forecast was more accurate, since it expected that the types of intervention in the US By the end of 2016 to 0.75% by September 2015.

Currently, the market expects rates within a year for the dollar to stand at 1.70%, while the Fed's Dots put it at 1.4%.

Just as before, the market was more skeptical of the Fed's own rate hikes, this time it is FOMC members who are more cautious about the degree of monetary policy normalization. In 2017 we will see who is right.