Fed Research Shows Investors Underestimate Path of Rate Rise
Low volatility across financial markets may signal investors are underestimating how quickly the Federal Reserve will raise interest rates, according to researchers at the San Francisco Fed.
“Surveys, market expectations, and model estimates show that the public seems to expect a more accommodative policy than Federal Open Market Committee participants,” Jens Christensen, a senior economist, and Simon Kwan, a vice president of financial research, said in a report today.
Fed officials in their June economic forecasts predicted their target interest rate will be 1.13% at the end of 2015 and 2.5% a year later. They are set to release updated projections Sept. 17. Federal funds rate futures are pricing in the first interest-rate increase in October 2015.
Expectations for the future path of the funds rate are a concern for Fed officials preparing to raise the main rate, which has been held close to zero since December 2008.
Indicators of future volatility in some asset markets “have fallen to low levels, suggesting that some investors may underappreciate the potential for losses and volatility going forward,” Fed Chair Janet Yellen said in a July 2 speech.
Research shows rate forecasts in the quarterly Summary of Economic Projections “can better align the public’s and the central bank’s expectations” and help improve macroeconomic performance, the researchers wrote.
Source: Bloomberg
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