As investors anticipate the first Federal Reserve (Fed) interest rate increase in a decade, we believe a dose of longer-term perspective is warranted.
In semiannual testimony before lawmakers earlier this week, Fed Chairwoman Janet Yellen reiterated her view that the federal funds rate is likely to rise this year. She also touted the benefit of the Fed acting sooner, and then proceeding slowly with additional rate increases. “If we wait longer, it certainly could mean that when we begin to raise rates we might have to do so more rapidly,” Yellen said on July 15 before a House panel.
In light of that statement, we took a look at how markets historically have projected future moves in short-term interest rates. And as Exhibit 1 shows, investors for nearly 30 years typically have overstated the path that interest rates have taken.
