Fed Errs on the High Side

Roland Czerniawski: The Federal Reserve has historically overestimated the future fed-funds rate in their forecasts. In this week's chart, we look at historical FOMC fed-funds rate projections. The green line represents the actual effective fed-funds rate, while the other various colored lines represent the Fed's projections for a particular year at any given point in time. 

For example, in 2012, the Fed forecast that the fed-funds rate would be around 1% by the end of 2014. Starting in 2013, they began adjusting that forecast down to just 25 basis points. A similar pattern can be noticed in projections for 2015, 2016, and 2017, when the Fed was consistently raising their fed-funds rate forecasts until late 2014. According to those earlier forecasts in 2014, the Fed thought that rates would be well above 1% by the end of this year, which we now know was a long overshot. 

Starting in 2015, the Fed governors began to readjust their forecasts down. According to the more recent projections from the September FOMC meeting, the governors now see the fed-funds rate at 3% by the end of 2017 and somewhere near 3.75% in the long run.

Given recent developments and further delays in the timing of the Fed's liftoff, it's likely that the fed-funds rate forecasts for future years will be adjusted down even further. This suggests that the Fed has historically been too optimistic with their monetary-policy projections; not until last year did the Fed governors finally accept the slower 2.0% to 2.5% economic growth as the new reality. 

Investors should be aware that the actual fed-funds rate typically differs widely from the Fed's projections, suggesting that the path of rate normalization is highly uncertain.