According to the Bloomberg, on January 30, Federal Reserve Bank of St. Louis President James Bullard said investors are wrong to expect the Fed to postpone an interest-rate increase beyond midyear, with the U.S. economy leading global growth and unemployment dropping and noted that:
The market has a more dovish view of what the Fed is going to do than the Fed itself…
… Markets should take it at face value from the Fed’s rate projections
In this context, I decided to take a look at both Fed fund futures and latest FOMC median forecasts (December) and the fact is that the gap between investor’s expectations and Fed guidance is simply HUGE. As a matter of fact, Fed officials expect the benchmark funds rate rise to 1.125% by the end of 2015 while investors are only betting on 0.410%.
Of course, Fed’s forecasts seem to be too agressive as they imply four rate hikes for 2015 in a context of 1) CPI’s weakness, 2) global slowdown and 3) geopolitical tensions, but a liftoff by midyear remains the base case scenario. Separately, according to Fed funds futures, investors see only a 15% chance that the Fed will raise its benchmark rate in June.
As a consequence, this situation implies that there is still a huge potential of appreciation concerning the USD especially as:
1) ECB will implement QE next month.
2) SNB has an unofficial corridor of CHF1.05-CHF1.10 against €.
3) BOJ will keep on implementing an accommodative monetary policy.