Here’s how bad the Fed is at predicting rate hikes

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In January, Fed Vice Chair Stanley Fischer predicted that four rate hikes were "in the ballpark" for 2016.

Of course here we are at the end of September, with only two Fed meetings remaining for the year, and the Fed has yet to hike rates even once.

In its statement for its September meeting, the FOMC noted that the case for a rate hike has strengthened, but that it is waiting for "further evidence of continued progress toward its objectives" before moving ahead with a rate hike. 

Looking at the Fed's "dot plot," all FOMC members still believe at least one rate hike will occur by the end of the year, but that's down from the two rate hikes that were expected in the June projections.

And that's the problem. The Federal Open Market Committee has been "too optimistic for too many years," Deutsche Bank's Torsten Sløk wrote in a note to clients.

Each and every year the Fed expects lots of rate hikes only to see the year come and go with little or no action. 

Take a look at the projections over the last three years. Not good.



U.S. Rate Hike: What’re The Odds?

Various Fed presidents have been yapping the last two weeks about rate hikes. The market is starting to look convinced. Meanwhile, GDP estimates by the Atlanta and New York Fed staff have been sinking like a rock.

Rate-Hike Odds

Odds Creeping Up

Since Friday, the odds of at least one hike through the December FOMC meeting increased to 74.5% from 69.5%. The odds of two hikes increased from 5.5% to 7.4%.

This degree of conviction seems quite premature given some key reports coming out later this week: Import and export prices on Thursday, and retail sales and producer prices on Friday.

Given there is an asset bubble, the Fed ought to hike, and should have two years ago minimum (assuming of course there is a Fed), but that is not the way the Fed thinks.

But there ought not be a Fed to hike. We would be better served by the free market.

In the absence of central bank manipulation, bonds would not trade with negative yields, toggle bonds would be punished with high yields if they existed at all, and we would not be in the third financial bubble since 2000.

It’s impossible to know what is precisely on their minds, but I rather doubt they believe there is a full blown asset bubble.

Convinced A Hike is Coming?

Given we have seen high odds of hikes in February, March, June, etc., all vanish for one reason or another, I am not convinced.

Two good retail reports and a couple respectable jobs report would convince me.

Currently the GDPNow forecast is 2.1% for third quarter, the FRBNY Nowcast is 2.2% for third quarter and 1.3% for fourth quarter.

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