From September 2012 to March of this year, the Fed had been remarkably successful at guiding the market’s expectations for future interest rates through publication of its unemployment projections. As today’s Geo-Graphic shows, when the Fed lowered its unemployment projection for a given future date the market raised its projection for interest rates around that date proportionately. It was a tightly correlated dance.
Then came Bernanke’s taper talk.
As we showed in our last post on mortgages and monetary policy, the rate reaction to the Fed chairman’s May 22 and June 19 comments, suggesting an imminent slowdown in asset purchases, was sudden and sharp. As today’s figure shows, the comments also triggered a jump in the market’s rate expectations for second-half 2015 to a level well beyond what would earlier have been expected, given the Fed’s updated unemployment projection.
The market now seems to believe that the Fed will raise rates more quickly and substantially after the unemployment rate crosses the Fed’s 6.5% threshold, an observation consistent with a hawkish interpretation of Bernanke’s taper talk.
Many pundits have suggested that the chairman’s comments were misconstrued, and that he had no intention of signaling higher future rates than the market had previously inferred. If so, the Fed will have to walk the market back with some clarity on how it will steer rates once unemployment falls below 6.5%.
FOMC: Economic Projections from June 2013
Bernanke: May 22 Economic Outlook Congressional Testimony
Wonkblog: The Fed’s Tricky Messaging
Wall Street Journal: Up for Debate at the Fed Is a Sharper Easy-Money Message