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Fed Week: One and Done?

How to stay one step ahead of the Fed

by Murray Gunn
Updated: June 13, 2017

Editor's Note: Adapted from the Market Insight page of our Interest Rates and Currency Pro Services.

The Federal Reserve Open Market Committee meets this week with the interest rate announcement due at 2 PM Eastern time on Wednesday. A rate hike is fully priced into the Fed Funds futures market, and so it would be a big surprise if they did nothing.

As usual, the mainstream financial media will be trying to read the runes of the statement for "guidance" on future policy. Our own guidance as to the Fed's future plans will, as always, come from the bond market price action itself -- because where prices go, the Fed tends to follow.

This chart shows you that the Fed has hiked rates since 2015 only after market rates had risen:

Fed follows the market

Market interest rates move first and then the Fed acts.

Of course, some may suggest that inter-meeting Fed speaker statements play a role in guiding market rates, but interpretations of speaker comments are too subjective and varied to suggest a clear relationship with market rates. As Chapter 3 of Robert Prechter's Socionomic Theory of Finance demonstrates,

"Central bank policy does not control interest rates; it's the other way around."

In fact, market rates are beginning to hint that a pause in the hiking cycle may be coming. The chart below shows you that the Fed Funds futures curve displays a clear curve-flattening over the last month.

In other words, market expectations of future Fed hikes are starting to wane.

Fed funds future pricing

On Wednesday, expect the normal excitement around the Fed announcement -- but, for an objective guidance on future Fed actions, keep calm... and follow market rates.

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