What To Do When Experts' Inklings About Interest Rates Miss the Mark

May 06, 2024

The most recent Federal Reserve decision on interest rates last week kept rates the same, likely coming as a surprise to market strategists late in 2023 who had an inkling that interest rates may have been cut by now.

For example, the global wealth manager UBS foresaw, surprisingly, cuts of 2.75% for 2024 that were set to begin at the March meeting. As Bloomberg reported less than 6 months ago:

“We don’t see the conditions for why this time is so different,” Baweja said in an interview at UBS’s London office. “Inflation is normalizing quickly and by the time we get to March, the Fed will be looking at real rates which are very high.”

The strategists expect the benchmark federal funds rate to fall to between 2.5% and 2.75% by the end of 2024, and see the terminal rate at 1.25% by early 2025. Their view is based on an expectation that the US economy will slide into recession by the second quarter.”1

They were wrong, and they weren’t the only ones. The above chart from the Wall Street Journal in an article titled “Investors Are Almost Always Wrong About the Fed” shows how often market expectations don’t meet the effective rate.2

It was not only strategists backtracking and investors’ expectations being wrong. The Fed has been wrong about the Fed in the past.

They missed it two years ago. DataTrek, keeping receipts, said:

…In May 2022 Fed Chair Powell said 75 basis point hikes were “not something that the committee is actively considering”. The Fed went on to raise rates by that amount at each of the next 4 meetings...Fast forward 2 years, and today Powell said further hikes were “unlikely”…”3

One of the reasons for the shift is that inflation continues to be a bother, and the Fed Chairman saying, “I don’t know how long [progress on inflation will] take”.4 Maybe the most important words in Powell’s statement are three: “I don’t know”.

This is another invitation to caution when making investment decisions based on professional predictions. Forecasts fail. Sentiment shifts. The only certain thing is uncertainty in markets.

This does not mean investors need to be uncertain about their investment allocation.

It can feel like you must respond to each and every economic update or forecast by switching your investment choices when sometimes it’s best to do nothing. One Certified Financial Planner put it this way: “Here is the paradox: It’s harder to leave plans unchanged while others scream the world is on fire. Taking action is easy; doing Nothing takes work but provides long-term rewards.”5

Your investment choices should be guided by present needs, future goals, and personal risk tolerance.

Not inklings.

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Sources:

1 “UBS Strategists See Far Deeper Fed Rate Cuts Than What Markets Are Pricing”, November 13, 2023. Accessed online: UBS Strategists See Far Deeper Fed Rate Cuts Than What Markets Are Pricing

2 “Investors Are Almost Always Wrong About the Fed”, Eric Wallerstein, February 8, 2024. Accessed online: https://www.wsj.com/finance/investing/investors-fed-interest-rates-a842073c

3 Tweeted by @DataTrekMB on May 1, 2024 at 3:23pm.Nick Colas & Jessica Rabe (DataTrek) (@DataTrekMB) on X

4 “Federal Reserve holds rates steady. Here's what that means for your money”, May 1, 2024. Accessed online: https://www.cbsnews.com/news/federal-reserve-meeting-rate-decision-may-1-2024/)

5 Tony Isola, May 1, 2024, “Doing Nothing is Hard Work”. Accessed online: https://tonyisola.com/2024/05/doing-nothing-is-hard-work/