Photo Credit: Moon Lee || When is this train going to arrive?
There are several ways to gauge the Federal Open Market Committee wrong. I am often guilty of a few of those, though I hope I am getting better.  Don’t assume the FOMC:
- Shares your view of how economies work.
- Cares about the politics of the situation.
- Knows what it really wants, aside from magic.
- Won’t change its view by the time an event arrives that was previously deemed important for monetary policy.
- Cares about the reasoning of dissenters on the committee.
- Understands what is actually happening in the economy, much less what its policy tools will really do.
But you can assume the FOMC:
- Cares about the health of the banks, at least under extreme conditions
- Wants to do something good, even if their minds are poisoned by neoclassical economics
- Will err on the side of saying too much, rather than too little, when it feels that its policies are not having the impact desired on the markets and economy.
- Will act in the manner that most protects its continued existence and privileges.
So if we want to guess when the FOMC will tighten, we can do three things:
- Look at market opinion
- Look at the FOMC’s own opinions, or
- Something else
Let’s start with market opinion.  At present, Fed funds futures have the Fed funds rate rising to 0.25% in the third quarter of 2015, and 0.50% in the fourth quarter.  Now, market opinion has tended to be ahead of the actual actions of the FOMC on tightening policy, so maybe that will be true in the future as well.  So far, those betting for tightening in the Fed funds futures market have been losing over the last few years along with those shorting the long Treasury bond, because rates have to go up.
Okay, so what does the FOMC think? Â Starting back in January of 2012, they started providing forecasts to us, and here is a quick summary of their efforts:
