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FOMC Too Soon for March Madness?

Merra Lee Moffit is a professional financial planner and wealth strategist with the Good Life Financial Group who provides business planning, retirement planning for individuals and business owners, education planning for college, estate planning, help with managing taxes and savings, and more in the Reading, Wyomissing, Lancaster, Exeter and Sinking Springs areas.

As we enter March, market participants are already looking ahead to the Federal Reserve’s (Fed) next Federal Open Market Committee (FOMC) meeting. While the meeting isn’t until March 15 – 16, 2016, markets are already trying to decipher how the widening disconnect between what the Fed plans to do with the fed funds rate and what the market thinks the Fed will do will be resolved. Part of the problem is timing. The latest set of “dot plots” — where each of the 19 FOMC members think the fed funds rate will be at the end of 2016, 2017, 2018, and beyond — is nearly three months old, having been released at the conclusion of the December 15 – 16, 2015 meeting. The December 2015 dot plots show that the Fed plans to raise rates by 100 basis points (1%) this year (or four 25 basis point hikes). The market, as measured by the fed funds futures market, doesn’t think the Fed will raise rates again until late 2017. Yes, you read that correctly, late 2017, nearly two years from now [Figure 1].

Based on recent comments from Fed officials and the Fed’s relatively high tolerance for financial market volatility, our view is that the March 2016 update of the FOMC dot plots may show that the Fed plans to raise rates by at least 50 (and perhaps even 75) basis points this year. Although this adjustment would help to narrow the disconnect between the FOMC and the market somewhat, it is nowhere near closing the gap completely. So, why the disconnect? March madness, perhaps?

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Posted in Weekly Economic Commentary
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