Bond Market to Fed: Your 4% Rate Forecast Is Way Too High

Bond Market to Fed: Your 4% Rate Forecast Is Way Too High

A Bloomberg article this morning touches on the message being sent to the US Federal Reserve by the bond market. According to prices market players do not think the US Fed is going to be able to increase rates as far or as fast as the Fed has said.  “The bond market, unparalleled in predicting shifts in the U.S. economy over the decades, has a message: interest rates aren’t going to rise as high as even the Federal Reserve’s own forecast,” according to the story. “The Fed had been saying 4%....[but there is a] deepening concern among bond investors that tepid wage growth and a lack of inflation will persist for years to come, and hold back growth as the Fed moves to end its unprecedented monetary stimulus.”

“The market’s pricing in an extraordinarily slow Fed,” Margaret Kerins, the Chicago-based head of fixed-income strategy at Bank of Montreal. “Potential growth is a huge determinant of that long-term rate and most people are buying into the idea of lower potential growth.”

Which is maybe not a surprise. The boomers are retiring. Oil prices continue to stay high. New shale oil production is turning out to be very expensive, this is shorting out consumer recoveries. Retail sales are dismal. Any increase in rates will have an effect on consumers and markets. BMO forecasts the central bank’s benchmark Federal funds target rate will peak at 3.75 percent. The Montreal-based bank’s estimate for this so-called terminal rate was 4 percent at the start of 2014.

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