FOMC Dot Plot is Poor Predictor of Fed Funds Rate

Summary:

What should we make of this hawkish bias with the Fed? In the latest edition of LPL Street View Jeffrey Roach, Chief Economist at LPL Financial, addresses key takeaways for investors as they consider the impact from the Fed’s latest decision on interest rates.

As the economy is likely downshifting, investors should take heed that the Federal Reserve’s (Fed) current stance is unnervingly similar to early 2007.  During that time, the Fed held a tightening bias since they believed the housing market was stabilizing, the economy would continue to expand, and inflation risks remained. Clearly, their expectations were not met as the economy soon fell into recession. That’s not suggesting another 2008 is coming, but rather to highlight how fast the economic environment can change.

Periods of economic regime shifts are difficult for policymakers to manage. This current environment could be eerily similar to early 2007, when the Fed held a tightening bias on rates as they believed the housing market was stabilizing, the economy would continue to expand, and inflation risks remained. Both the January 2007 statement and the most recent one last week specifically mention the FOMC’s process in determining the extent of additional policy firming that may be needed. Clearly, those expectations were not met since we know what happened in later quarters. Despite the reference to 2007, our baseline is the economic slowdown does not produce another “2008,” yet investors should anticipate some volatility as the economic outlook remains cloudy.

With the Fed seemingly pushing out rate cuts, markets are probably going to be volatile over the next few quarters or at least until the inflationary story becomes clearer. That’s all for now, and continue to follow the LPL Research team on social media and take care.

Please continue to follow LPL Research on Twitter, LinkedIn, and YouTube for more insight.

You may also be interested in:

• U.S. Debt Deal with a Twist—Details of the Fiscal Responsibility Act – June 7, 2023
• Should Investors Care About The Debt Ceiling Drama? – May 26, 2023
• Top Charts as Fed Recalibrates: Key Takeaways for Investors – May 9, 2023