Fed Forecasting Futility

For some investors, Fed watching means trying to predict decisions to be made months in the future. That is a challenging exercise when new information relevant to those decisions emerges on a daily basis.

The consumer price index (CPI) report released on February 12 showed a higher-than-expected rise in prices for the month of January. That coincided with a marked drop in the likelihood of a rate cut at the June 2025 US Federal Reserve (Fed) meeting, from nearly 50% on February 11 to just 34% on February 12.

Additional economic data points obtained over the next two days changed the picture. Another inflation data source, the producer price index, showed that while prices overall increased more than expected, prices for components apart from food and energy were in line with expectations. And the retail sales report released on February 14 showed a substantial drop in consumer spending. By the end of the week, expectations for a rate cut in June were back up to 50%.

The Fed takes into account many inputs in its rate change decisions. The market is the most complete source of this information and therefore provides the best prediction of the future. And, even if you knew when the Fed would cut rates, it still might not help with bond allocation decisions. The Fed directly controls the federal-funds rate only and not the many other interest rates that drive bond portfolio performance. And market interest rates sometimes go the opposite direction of the Fed’s rate.

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Exhibit 1

Implied Probability the Federal-Funds Rate Will Be Cut at the June 2025 Meeting

This article originally appeared in Above the Fray, a weekly newsletter for Dimensional clients. It was not created, written, or produced by TwoTen Planning.

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