One of the hallmarks of our investment approach is to respect the fact that markets are extremely powerful (though not infallible) as forecasting tools. On average, they do a pretty damn good job at incorporating all of the expectations for the future into current prices, adjusting on the fly with every headline and every trade.
Note that this is not the same thing as saying that the markets always get it right. In fact, at extremes they tend to get the future precisely wrong. It’s just that most of the time we’re not at extremes.
This week’s FOMC statement and presser provides just one more example demonstrating the power of markets. The nation’s top economists had arrived at a consensus for the first Fed Funds rate hike of the cycle to take place at the June 2015 meeting. The bond market, stubbornly, had indicated a traders’ consensus that pegged the first rate hike for the September meeting or even later.
Yesterday, after the Fed said its peace, the economists ended up capitulating. Their forecasts have now been brought into alignment with what the bond market had been saying all along – a September meeting rate hike consensus.
Just two weeks ago, the top economists for this group had been centered around June as the likely date for the Fed to finally end the near-zero rate policy it adopted in December 2008. The shift brings these economists into closer alignment with the bond market’s view for when the Fed will make its move.
Twelve of 16 U.S. primary dealers that do business directly with the Fed said on Wednesday they see a rate liftoff in September or later. Just four of those responding to a Reuters poll stuck with June as their forecast.
By contrast, in a March 6 poll taken after the latest in a string of robust U.S. employment reports, just seven of 16 respondents predicted a September or later liftoff, while nine had called for June.
Opinions and subjective macro views are just fine, knock yourself out. But ignore price – the message of the market – at your own risk. The more people there are estimating a thing, the better the estimation.