Fed Accomodates Market Opinions

The Federal Reserve (Fed) and the financial markets often disagree about future interest rates. Figure 1 documents this, plotting the evolution of the Federal Funds Rate (FFR) over time, along with predicted paths. Empirical evidence suggests these disagreements are at least partially driven by differing opinions about future economic activity. These opinionated disagreements are a source of concern for the Fed to the extent that they lead the market to perceive the Fed’s policy decisions as mistakes.