The US central bank and investors seem to be in full agreement about an interest rate hike next week. The picture afterwards, however, is starkly different.
As seen on the chart below, the Fed sees interest rates at a median of 2.12% at the end of 2018, and 2.688% at the end of 2019 – well above the futures markets’ implied rates of 1.85% and 1.98%, respectively. This happens, partially, as the Fed believes that low inflation may be temporary, while some investors, such as Ken Leech – CIO of Western Asset (a Legg Mason affiliate), are not that convinced and prefer to look at the yield curve for guidance.
On Wednesday 6th, the difference between the 10 and 30-year Treasury yields fell to 37.8 basis points, the lowest since the end of 2008 – a signal of relatively low growth and inflation ahead.
Source: Bloomberg Barclays Capital 6 Dec. 2017. FOMC is the median estimate from members of the rate-setting Federal Open Markets Committee