The U.S. Federal Reserve’s decision to leave its interest-rate target unchanged has dispelled some of the uncertainty looming over global markets. It hasn’t done much, though, to resolve the sharp disagreement between the Fed and investors about what the central bank and the U.S. economy will do from this point on.
Consider the forecasts that the Fed published along with today’s much-awaited monetary-policy statement. For the most part, officials think that a growing economy will allow the central bank to increase its target significantly during the next year or so: Their median projection for the end of 2016 is 1.375 percent (though one Fed official did predict a negative rate). Judging from prices in futures markets, that contrasts sharply with the expectations of investors. As of Thursday afternoon, they saw the target rate reaching just 0.75 percent. The gap between the two was actually a bit larger than in June. Here’s how that looks:
Professional economists, for their part, are more optimistic than the Fed. Among those polled by Bloomberg, the median forecast for 2016 growth in real U.S. gross domestic product is 2.7 percent, compared with Fed officials’ 2.3 percent. The economists, who hail from institutions such as the International Monetary Fund and Wall Street banks, also expect inflation to accelerate to the Fed’s target of 2 percent in 2016. Fed officials predict 2016 inflation of just 1.7 percent.
Here are a couple charts showing how the differences of opinion on growth and inflation have evolved since early 2014 (the comparison isn’t perfect — the Bloomberg economists’ consensus is a median, while the Fed’s is the midpoint of forecasts with outliers removed):
The disagreements mean that whatever happens, somebody will be surprised. If investors prove wrong, markets could be in for a lot more turbulence as the Fed raises rates.
