Fed: Rates to Stay Low through 2022, But Watch Fed Futures

Vito J. Racanelli

The Federal Reserve made a bold prediction last Wednesday at the end of the regularly scheduled Federal Open Market Committee meeting. It said rates are going to stay low for years, through 2022.

Come on, you say. Everyone knows that. That’s not bold. Maybe and then again maybe they won’t stay low for years. I think it’s bold because the future is ofttimes hardly knowable 2 days out, let alone two years. The smart investor is skeptical of specific and definitive predictions about the long-term future—even from the Fed. Moreover, as I’ll note below, the Fed hasn’t been right about rates for years, actually. If you really want to know what’s going to happen to US interest rates then you should watch the Fed futures market.

Additionally, in new projections released Wednesday, all 17 Fed officials who participate in the rate-setting meetings said they expect to hold rates near zero next year, and 15 of them projected rates would stay there through 2022. That is two years from now. The Fed certainly believes in its own powers of projection.

So, what did the FOMC say last Wednesday. Fed chairman Jeremy Powell said—in a line that might come back to bite him: “We’re not thinking about raising rates.” said Mr. Powell. It’s the kind of line that will be memorable one way or another. The Fed reiterated its commitment to supporting the economy following the shock caused by the pandemic.

On the one hand, certainly with the US economy in recession it’s fair to say that rates aren’t going up soon. But it’s becoming clear that this was a coronavirus-induced recession and not a “natural’ recession that comes of overextended companies and falling demand.

Investors should look to the Fed futures. I’ve been watching the Fed’s famous “dot plot” of rate expectations and matching it against the Fed futures markets for more than five years. Guess what? The Fed futures market’s accuracy record is far better than the Fed itself. Now it just happens the futures say rates are going to stay low but keep an eye on it. And changes there about higher rates come about long before the Fed policymakers begin to talk about it.

There’s that Fed put to worry about, after all, which helps keep markets calm. Just one word from the Fed about higher rates would likely send markets reeling these days. By the way, all this was none too good for the bank and financial stocks, which fell 9% on the week.

Additionally, most Fed officials projected the economy would contract by anywhere between 4% and 10% this year.

Even with the report last week that the economy added jobs in May, there are still nearly 20 million fewer Americans employed than there were in February. Powell suggested that that millions of people possibly wouldn’t go back to their old job or their prior industry, given the potential for reduced demand for goods or services that require increased human contact he said. Initial jobless claims fell to 1.5 million last week, signaling a slow start to a potential recovery.

The yield on the benchmark 10-year U.S. Treasury note dropped sharply last week to about 0.71% vs 0.89% one week previous. Next FOMC meeting on July 28-29.

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Vito J. Racanelli
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