Market vs Fed’s view on future interest rates

Fed expects interest rates to increase to 1pc by the end of 2015 and to 2.5pc by the end 2016. Market participants, on the other hand, expect a slower growth. A research (conducted by Reuters and based on evidence from economist surveys, futures contracts, and economic models) documents that the general market expects interest rates to rise to 0.75pc by end of 2015 and then to 2.13pc by the end of 2016.

Despite the recent rally in the stock markets and better than expected economic data, the interest rate growth expectations remain on the downside and market has failed to account for any short-term monetary policy tightening. I believe this has to do with the US labor market being fragile at the moment, which continues to deviate from the overall economic growth.

The mismatch between the investor expectations and Fed’s plan adds to the list of problems being faced by the central bank. Any ‘unexpected’ surge in the interest rates can prove to be negative for the equity markets and can seriously hamper the economic growth.

Fed members have emphasized that the future monetary policy actions will be heavily based on the upcoming economic data. More light will be shed on this in the coming week, when FOMC members release their latest forecasts.

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