The Forecasting Record of the Fed and the Market

Apollo Chief Economist

The Fed started publishing the dot plot in 2012, and comparing the Fed’s forecasts with the forecasts from Fed funds futures yields three important conclusions, see charts below:

1) The Fed’s and the market’s forecasts about the future path of the Fed funds rate are almost always wrong.

2) The forecasts are very similar, and the Fed has managed to anchor market expectations about where it thinks the Fed funds rate is going.

3) The direction of the forecasting mistake is always identical, suggesting that the market is taking its cue about the future path of interest rates from the Fed’s dot plot.

The good news is that the Fed is able to anchor market expectations, and thereby reduce volatility in financial markets. 

The bad news is that when the Fed’s forecast is wrong and the FOMC has to move from three cuts in 2024 to say, one cut, it will hurt Fed credibility.

The US economy’s lower interest-rate sensitivity, combined with strong structural and cyclical tailwinds to growth, brings us to the conclusion that the Fed will not cut interest rates in 2024.

Market forecasts are almost always wrong about the future path of the Fed funds rate
Source: Bloomberg, Apollo Chief Economist
Fed forecasts are almost always wrong about the future path of the Fed funds rate
Source: FOMC, Bloomberg, Apollo Chief Economist

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