Macro Minute: Week of June 19, 2023

When people signed up for the Macro Minute you were asked what you would like to hear about, and several people asked about interest rates. Every time I personally think about interest rates, I think of this chart:

I have seen a version of this chart for years, and this version is by Dr. Timo Teuber a Senior Portfolio Manager Multi Asset at Allianz Global Investors. The blue line is what the actual Fed Funds Target rate has been. The grey squiggles are the predictions of where the Fed Funds Target rate would be in the future. As you can see, predictions rarely lined up with reality. 

While we can think we know how the future will play out, reality is often times different. One of the reasons I think that predictions have been so wrong on where the Fed Funds rate should be is because we forget that the Federal Reserve is a reactionary body. So many market participants display frustration with Fed policy instead of just realizing that they have two main jobs. They try to maintain full employment and produce stable prices. Both of those are measured historical numbers not forward-looking expectations. 

As such, you can expect rates to stay lower longer than they should and stay higher longer than they should in general. I am in jeopardy of breaking my Macro Minute rule by not keeping this short, so I will wrap it up with this. If history is a guide on rates, they will be different than what we expect.

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