Interest Rate Forecasting – Does it Affect Your Portfolio! | News or Noise

 

The Federal Reserve is starting to raise rates in March and sell side strategist are saying they’ll raise short term interest rates 5, no its six, no 7, nope I raise your seven and its 8 times this year to combat inflation.  How do we know? Well Fed Funds Futures are telling us so, per economists and TV personalities on CNBC!

I’m Chris Perras, Chief Investment Officer with Oak Harvest Financial Group. And This is our investment team’s mid-week release when we examine a news item, headline, or story making the rounds from publicly available sources and ask, “Is it News or Noise?”

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Viewers, inflation is continuing to trend higher than I expected with the current culprit being Russia’s attack and invasion of Eastern Europe’s Ukraine driving up already elevated oil prices and grain prices as well.  My prayers go out to families on both sides of the border who have been brought into this event by the powers to be beyond their control.  Viewers, this discussion is focused on the constant TV rhetoric about the Federal Reserves path for raising interest rates and the forecasting ability of the often-quoted Fed Funds futures markets.

To be brief.  These forecasts based on where the Fed Funds futures markets are trading are historically of no help to investors in predicting future interest rates.  One need to look no further than the real-time trading markets for Treasury bonds which in the last 7 to 10 days, have pushed these “odds” from 7 or 8 raises back to 4 or 5. In a few days.

One can blame the flight to quality that has transpired since Russia invaded Ukraine.  Or you can blame Chairman Jerome Powell himself, and his recent public comments of planning on raising short term rates by 25bps in March and then measured moves each meeting thereafter.  Either way, the last 10 days should prove to those watching TV that the forecasting ability of this data series is total garbage.

As long-time “Keeping you connected to your money” listeners know, this is what my own personal research has said about this data for years.  If you don’t believe me and my word, here is some hard academic research from Ken Petersen and Laffer Associates, founded by Arthur Laffer, entitled “Predicting the Fed”. The following is quoted from there research abstract-

“Is Predicting the federal funds rate and beating the federal funds futures market mission impossible? Not so”.

Their model which used only historical data was more predictive and better able to explain future monetary policy by the Fed than a forward-looking measure like the federal funds futures rate. The fact that the federal funds futures market can be beaten by a statistical model, suggests that the federal funds futures market lacks eciency. The trading financial markets allocate too much weight to current Federal Reserve communication and other real-time macro events and allocates too little weight to past monetary policy behavior.”

What’s this mean in laymen’s and investors terms? It means this, turn off your TV when Steve Liesman, El-Erian, or others on CNBC quote this meaningless statistic. The data says the Fed is a creature of habit, behavioral finance works, history repeats, the trend is your friend and outside economists, and traders know almost nothing about the Fed future rate path beyond a few weeks. It means stay away from trading this market, and outside of entertainment, you can generally disregard this often quoted “real-time” data, regardless of how smart it may sound.

And Viewers, feel free to give us a call here to speak to one of our advisors.  Let us help you craft a financial plan that meets your retirement goals and needs first, and your greed’s second. Call us at (877) 896-0040 we are here to help you on your financial journey into and throughout your retirement years.

I’m Chris Perras and Have a great week!

 

News or Noise: Noise!

https://opencommons.uconn.edu/econ_wpapers/200807/

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