History Warns The Fed Will Raise Interest Rates More, Not Less
History Warns The Fed Will Raise Interest Rates More, Not Less
"Currently, the December 2019 Fed Funds futures contract implies that the Fed will reduce the Fed Funds rate by nearly 75 basis points (0.75%) by the end of the year. While 75 basis points..
History Warns The Fed Will Raise Interest Rates More, Not Less
“Currently, the December 2019 Fed Funds futures contract implies that the Fed will reduce the Fed Funds rate by nearly 75 basis points (0.75%) by the end of the year. While 75 basis points may seem aggressive, if the Fed does embark on a rate-cutting policy and history proves reliable, we should prepare ourselves for much more.”-Investors Are Grossly Underestimating the Fed
Our advice to plan for the unexpected was prescient. When we wrote the article in July 2019, Fed Funds were between 2.25% and 2.50%. The Fed Funds futures contracts were implying the Fed would reduce rates by .75% in the forthcoming months.
By April 2020, Fed Funds were trading near zero, 1.50% below where the market thought they would be in mid-2019. The article quantifies the Fed always raises or cuts rates much more than expected.
Today, the market is pricing in steady increases, starting in 2002, for the Fed Funds rate. Despite high inflation and low unemployment, the Fed refuses to even think about thinking about raising rates.
Given the Fed’s posture, it may appear traders are overestimating how much the Fed will raise rates. However, we caution once again; traders always underestimate the Fed.
Evidence
Whether higher Fed Funds seems logical is irrelevant. As investors, we need to strategize in case history proves clairvoyant. Given the Fed is starting to normalize monetary policy, it’s worth revisiting the article from 2019.
We recommend reading the article’s first section linked above for more background on Fed Funds and their futures contracts.
The graph below shows how much the Fed Funds futures market consistently over or underestimates what the Fed does. The green areas and dotted lines quantify how much the market underestimates how much the Fed ultimately reduces rates. The red shaded areas and dotted lines are akin to today’s potential rising rate situation. They show estimates for rate cuts fall short of the Fed’s actual actions.
Per the article:
“As shown in the graphs above, the market has underestimated the Fed’s intent to raise and lower rates every single time they changed the course of monetary policy meaningfully. The dotted lines highlight that the market has underestimated rate cuts by 1% on average, but at times during the last three rate-cutting cycles, market expectations were short by over 2%. The market has underestimated rate increases by about 35 basis points on average.”
The good news, with rate increases on the horizon, is the market’s margin of error for rate increases is much less than decreases.
Current Expectations
The Fed Funds futures markets are now pricing in a 100% chance of a 25bps rate hike by August 2022 and a second hike by year-end. They also imply two more hikes in 2023.
The graph below highlights the history of Fed Funds as well as the futures implied forecast. We also show the Federal Reserve’s median forecast.
The Fed is coy about tapering QE, let alone raising interest rates. While the forecasts shown above may seem aggressive, odds are they are conservative. Based on the last four significant rate-hiking experiences, we should expect an additional 35bps, above market expectations, of rate increases by the end of December 2022. 1% Fed Funds here we come!
Why The Market May Be Underestimating the Fed
The current environment is unique, making our quantitative forecast questionable. Simply the unique ways in which the pandemic crippled economic activity along with the massive amounts of fiscal and monetary stimulus are beyond compare.
Inflation at 5.4% is running more than twice the rate of the prior ten years. Of more significant concern, it is showing signs it may be persistent. Chairman Powell recently noted as much: “The risks are clearly now to longer and more persistent bottlenecks, and thus to higher inflation.“
The Fed has not faced such an inflationary environment since the late ’70s and early ’80s. Fractured supply lines, shortages, transportation problems, and rising wages threaten to keep upward pressure on prices. If elevated prices remain persistent, the Fed will need to act with aggression to reduce it.
If such a scenario plays out, the market may be grossly underestimating the Fed’s resolve and political pressure on them to quell inflation.
Why The Market May Be Overestimating the Fed
Economic growth is slowing rapidly. Third-quarter GDP was just 2%, well off the 6.7% pace of the second quarter. Forecasts for the fourth quarter range widely from 3-6%. However, estimates for the third quarter were also north of 5% only a month ago.
If some of the supply problems abate and economic activity remains weak, the Fed could slow their taper schedule and leave Fed Funds alone. One could argue they might taper QE only to increase monthly purchase amounts in the first quarter of 2022. In this case, Fed Funds would stay near zero.
Summary
As we wrote inInvestors Are Grossly Underestimating the Fed, “the market has a long history of grossly underestimating, in both directions, what the Fed will do. The implications to stocks and bonds can be meaningful. To the extent one is inclined and so moved to exercise prudence, now seems to be a unique opportunity to have a plan and take action when necessary.”
Two years after having written those words, they remain equally important today. The equity markets and most financial assets, for that matter, are trading at extreme valuations. It is not future economic prospects driving the enthusiasm. Instead, it is the Fed’s radical monetary policy. In What is the Federal Reserve Hiding From Us? we offer investors caution. “The most inappropriate monetary policy” is the sole bedrock supporting the most egregious asset valuations in well over 100 years.”
If easy money is the bedrock of valuations and the Fed is getting ready to shift the bedrock, investors best pay attention to market forecasts and how the Fed ultimately acts.
BUFFALO, NY- March 11, 2024 – Impact Journals publishes scholarly journals in the biomedical sciences with a focus on all areas of cancer and aging research. Aging is one of the most prominent journals published by Impact Journals.
Credit: Impact Journals
BUFFALO, NY- March 11, 2024 – Impact Journals publishes scholarly journals in the biomedical sciences with a focus on all areas of cancer and aging research. Aging is one of the most prominent journals published by Impact Journals.
Impact Journals will be participating as an exhibitor at the American Association for Cancer Research (AACR) Annual Meeting 2024 from April 5-10 at the San Diego Convention Center in San Diego, California. This year, the AACR meeting theme is “Inspiring Science • Fueling Progress • Revolutionizing Care.”
Visit booth #4159 at the AACR Annual Meeting 2024 to connect with members of the Agingteam.
About Aging-US:
Agingpublishes research papers in all fields of aging research including but not limited, aging from yeast to mammals, cellular senescence, age-related diseases such as cancer and Alzheimer’s diseases and their prevention and treatment, anti-aging strategies and drug development and especially the role of signal transduction pathways such as mTOR in aging and potential approaches to modulate these signaling pathways to extend lifespan. The journal aims to promote treatment of age-related diseases by slowing down aging, validation of anti-aging drugs by treating age-related diseases, prevention of cancer by inhibiting aging. Cancer and COVID-19 are age-related diseases.
Agingis indexed and archived byPubMed/Medline (abbreviated as “Aging (Albany NY)”), PubMed Central, Web of Science: Science Citation Index Expanded (abbreviated as “Aging‐US” and listed in the Cell Biology and Geriatrics & Gerontology categories), Scopus (abbreviated as “Aging” and listed in the Cell Biology and Aging categories), Biological Abstracts, BIOSIS Previews, EMBASE, META (Chan Zuckerberg Initiative) (2018-2022), and Dimensions (Digital Science).
Please visit our website at www.Aging-US.com and connect with us:
Mathematicians use AI to identify emerging COVID-19 variants
Scientists at The Universities of Manchester and Oxford have developed an AI framework that can identify and track new and concerning COVID-19 variants…
Scientists at The Universities of Manchester and Oxford have developed an AI framework that can identify and track new and concerning COVID-19 variants and could help with other infections in the future.
Scientists at The Universities of Manchester and Oxford have developed an AI framework that can identify and track new and concerning COVID-19 variants and could help with other infections in the future.
The framework combines dimension reduction techniques and a new explainable clustering algorithm called CLASSIX, developed by mathematicians at The University of Manchester. This enables the quick identification of groups of viral genomes that might present a risk in the future from huge volumes of data.
The study, presented this week in the journal PNAS, could support traditional methods of tracking viral evolution, such as phylogenetic analysis, which currently require extensive manual curation.
Roberto Cahuantzi, a researcher at The University of Manchester and first and corresponding author of the paper, said: “Since the emergence of COVID-19, we have seen multiple waves of new variants, heightened transmissibility, evasion of immune responses, and increased severity of illness.
“Scientists are now intensifying efforts to pinpoint these worrying new variants, such as alpha, delta and omicron, at the earliest stages of their emergence. If we can find a way to do this quickly and efficiently, it will enable us to be more proactive in our response, such as tailored vaccine development and may even enable us to eliminate the variants before they become established.”
Like many other RNA viruses, COVID-19 has a high mutation rate and short time between generations meaning it evolves extremely rapidly. This means identifying new strains that are likely to be problematic in the future requires considerable effort.
Currently, there are almost 16 million sequences available on the GISAID database (the Global Initiative on Sharing All Influenza Data), which provides access to genomic data of influenza viruses.
Mapping the evolution and history of all COVID-19 genomes from this data is currently done using extremely large amounts of computer and human time.
The described method allows automation of such tasks. The researchers processed 5.7 million high-coverage sequences in only one to two days on a standard modern laptop; this would not be possible for existing methods, putting identification of concerning pathogen strains in the hands of more researchers due to reduced resource needs.
Thomas House, Professor of Mathematical Sciences at The University of Manchester, said: “The unprecedented amount of genetic data generated during the pandemic demands improvements to our methods to analyse it thoroughly. The data is continuing to grow rapidly but without showing a benefit to curating this data, there is a risk that it will be removed or deleted.
“We know that human expert time is limited, so our approach should not replace the work of humans all together but work alongside them to enable the job to be done much quicker and free our experts for other vital developments.”
The proposed method works by breaking down genetic sequences of the COVID-19 virus into smaller “words” (called 3-mers) represented as numbers by counting them. Then, it groups similar sequences together based on their word patterns using machine learning techniques.
Stefan Güttel, Professor of Applied Mathematics at the University of Manchester, said: “The clustering algorithm CLASSIX we developed is much less computationally demanding than traditional methods and is fully explainable, meaning that it provides textual and visual explanations of the computed clusters.”
Roberto Cahuantzi added: “Our analysis serves as a proof of concept, demonstrating the potential use of machine learning methods as an alert tool for the early discovery of emerging major variants without relying on the need to generate phylogenies.
“Whilst phylogenetics remains the ‘gold standard’ for understanding the viral ancestry, these machine learning methods can accommodate several orders of magnitude more sequences than the current phylogenetic methods and at a low computational cost.”
Journal
Proceedings of the National Academy of Sciences
DOI
10.1073/pnas.2317284121
Article Title
Unsupervised identification of significant lineages of SARS-CoV-2 through scalable machine learning methods
While the size of the United States makes it hard for it to compete with the inter-city train access available in places like Japan and many European countries, Amtrak trains are a very popular transportation option in certain pockets of the country — so much so that the country’s national railway company is expanding its Northeast Corridor by more than one million seats.
Running from Boston all the way south to Washington, D.C., the route is one of the most popular as it passes through the most densely populated part of the country and serves as a commuter train for those who need to go between East Coast cities such as New York and Philadelphia for business.
Veronika Bondarenko captured this photo of New York’s Moynihan Train Hall.
Veronika Bondarenko
Amtrak launches new routes, promises travelers ‘additional travel options’
Earlier this month, Amtrak announced that it was adding four additional Northeastern routes to its schedule — two more routes between New York’s Penn Station and Union Station in Washington, D.C. on the weekend, a new early-morning weekday route between New York and Philadelphia’s William H. Gray III 30th Street Station and a weekend route between Philadelphia and Boston’s South Station.
According to Amtrak, these additions will increase Northeast Corridor’s service by 20% on the weekdays and 10% on the weekends for a total of one million additional seats when counted by how many will ride the corridor over the year.
“More people are taking the train than ever before and we’re proud to offer our customers additional travel options when they ride with us on the Northeast Regional,” Amtrak Executive Vice President and Chief Commercial Officer Eliot Hamlisch said in a statement on the new routes. “The Northeast Regional gets you where you want to go comfortably, conveniently and sustainably as you breeze past traffic on I-95 for a more enjoyable travel experience.”
Here are some of the other Amtrak changes you can expect to see
Amtrak also said that, in the 2023 financial year, the Northeast Corridor had nearly 9.2 million riders — 8% more than it had pre-pandemic and a 29% increase from 2022. The higher demand, particularly during both off-peak hours and the time when many business travelers use to get to work, is pushing Amtrak to invest into this corridor in particular.
To reach more customers, Amtrak has also made several changes to both its routes and pricing system. In the fall of 2023, it introduced a type of new “Night Owl Fare” — if traveling during very late or very early hours, one can go between cities like New York and Philadelphia or Philadelphia and Washington. D.C. for $5 to $15.
As travel on the same routes during peak hours can reach as much as $300, this was a deliberate move to reach those who have the flexibility of time and might have otherwise preferred more affordable methods of transportation such as the bus. After seeing strong uptake, Amtrak added this type of fare to more Boston routes.
The largest distances, such as the ones between Boston and New York or New York and Washington, are available at the lowest rate for $20.
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