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The Federal Reserve is arguably the most influential financial institution in the world. Their eight meetings a year are highly anticipated, their policy decisions are highly scrutinized, and their economic projections and commentary can move markets. Last month the Nasdaq sold off nearly 9% on concerns of heightened inflation and expected rate hikes by the central bank. The market reversed sharply after the January FOMC meeting on Chair Jerome Powell’s comments about rising inflation and monetary tightening. There are even trading strategies built on predicting market movements after the Fed’s comments and monetary policy surprises. While the monetary policy decisions made by the Fed have a material impact on the economy, their projections are not always accurate, especially when it comes to rate hikes.
Our chart of the week examines the summary of economic projections of GDP, unemployment, inflation, and the number of 25 basis point rate hikes projected for the year over the last eight years. Prior to the COVID pandemic in 2020, the Fed had fairly accurately predicted GDP, inflation, and unemployment, more often than not coming within 0.2% of actual full-year numbers. Ironically, when it comes to interest rate changes — the metric most directly controlled by the Federal Reserve — predictions worsen. While the Fed accurately foresaw no movement in 2014 and 2021 and were on the mark with three rate hikes in 2017, they greatly overestimated hikes in 2015 and 2016 and underestimated rate cuts in 2019 and 2020. Following four rate hikes in 2018, after starting the year predicting three, the Fed quickly reversed course in 2019, cutting rates three times, a sharp contrast to initial expectations for one additional rate increase.
This year the members of the FOMC are predicting three rate hikes, though history has shown us actual results could differ greatly. Monetary policy and economics are never an exact science, and the continually evolving supply and demand dynamics behind inflation make this year all the more challenging. There are simply variables that cannot be predicted. In other words, there is no crystal ball. As the year unfolds, we will continue to keep our clients abreast of policy updates out of the Fed as well as any other developments that could impact the course of rates.
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