Five Questions on the Fed -- The Global Economy NOW


版权所有 © DeepMacro Inc.

作者:Jeffrey Young


“美联储将在未来几个月加息,幅度将超过市场预期。它需要一个更具有说服力的长期策略来使通货膨胀回到目标水平。市场已经开始忽视美联储。” ——纽约时间2022年3月21日上午10:29。

"The Fed will raise rates in the next few months more than markets expect. And it needs a more convincing longer-term strategy to return inflation to target. Markets are already beginning to tune out the Fed." - 21 Mar 2022 10:29 AM NY time.


The FOMC dots show lower inflation but above-trend growth, below-trend unemployment rates, and negative real rates. Why?


Our best guess here is, "because that's what the markets are saying".



Currently, long-term breakeven inflation rates implied by Treasury securities are about 2.4% (for CPI, see Figure 1a, left), which is consistent with the Fed's target of 2% (for the personal consumption expenditures deflator).



Real long-term yields are about -0.7% -- in line with where they have been since dipping below 0% in 2012 (see Figure 1a, center). Low real economic growth implies low inflation.



And the Fed Funds futures market has a peak of a little over 2.5% (red line in Figure 1a, right). This is about 25 basis points higher than the level before last week's FOMC meeting (blue line in Figure 1a, right), and it is pretty close to the FOMC's dots.



True, the markets can be wrong. But the Fed has long argued and markets have been programmed to believe that market pricing is hard to beat. So as a first defense, the Fed can plausibly claim that its dots have validity, because they are consistent with market pricing. It is also true that, magnitude aside, this isn't the first time that market commentary has questioned the internal consistency of the dots. But the Fed has survived with its credibility intact during these previous episodes.


图1a. 五年五年远期盈亏平衡通胀率(左图),十年期美国国债实际收益率(中图),和截至2024年12月的联邦基金期货合约(右图),日期如示(百分比)

Figure 1a. Five-Year Five-Year Forward Breakeven Inflation Rate (Left), Real 10 Year US Treasury Yield (Center), and Fed Funds Futures Contracts out to Dec 2024 Contract (Right), Dates as Indicated (Pct)


注:五年五年远期盈亏平衡通胀率,即5Y/5Y Forward Breakeven Inflation Rate



2. 美联储对通货膨胀的偏好有多鹰派?
How hawkish is the Fed's bias on inflation?



Much more than it has been. Figure 2a shows the DeepMacro Central Bank Bias Index for Inflation (CBBI-I) for the Fed. The CBBI-I measures the net percentage of statements about inflation in all Fed communications that are "positive" (as in "high" or "increasing"). Currently the CBBI-I is about +80%, which is a historically high figure.



Fed rhetoric acknowledges that inflation is high and does not stress that inflation will quickly decline. The FOMC members' dots show an early peak and a rapid decline. What can we say about this disconnect? We think that rhetoric and dots are separate communication tools designed to send different signals. Currently, sounding "tough" on inflation, while presenting a rosy economic outlook, satisfies Fed critics on both sides: those who think the Fed is behind the curve, and those who fear that the Fed is trying to slow demand in order to reduce inflation.



Figure 2a. US: Central Bank Bias Index - Inflation, by Type of Communication, 1 Jan 2014 - 20 Mar 2022 (Pct Positive Bias)

来源:DeepMacro, Inc.



3. 美联储加息的幅度可能有多大?
How much is the Fed likely to hike rates?



In the next few months, by about 50 basis points more than the market implies.



Figure 3a shows DeepMacro's Short-Term Rates-1 (STR-1) model forecast for 2 year swap rates (orange line), which are closely related to the Fed funds rate, over the next three months, versus the market's three-month forward rate (blue line). At the moment, STR-1 forecasts that 2 year swap rates will be 2.93%, versus a market forward of 2.39%. The gap is about 54 basis points, which implies that the Fed will be hiking more than the market currently expects. In practical terms, this is consistent with 50 basis point rate hikes at each of the Fed's next two meetings (or a strong signal that such hikes are forthcoming).



Figure 3a. United States 2yr Swap Rate, DeepMacro Three-Month Forecast vs. Current Market Three-Month Forward Rate, 21 Mar 2019 - 19 Mar 2022 (Pct)

来源:DeepMacro, Inc.


4. 为什么STR-1预测值与市场远期利率的差距如此之大?
Why is the gap between the STR-1 forecast and the market forward so big?



Gaps on the order of 50bp are not unprecedented. We don't have to go back far in history to see this. Recently, it has been more than 1 percentage point, and there have been numerous times since 2010 when the gap has approached 50bp (see Figure 4a).



The STR-1 uses a random forest model to predict the gap between the current market forward and the realized 2 year swap rate, and this method is more responsive to nonlinear moves than commonly used techniques (such as linear regressions) are.


图4a. 实际差距,三个月两年掉期利率vs.市场远期利率,2010年9月28日-2021年12月17日(百分比)

Figure 4a. Realized Gap, 2 Year Swap Rate in Three Months vs. Mkt Forward, 28 Sep 2010 - 17 Dec 2021 (Pct)

来源:DeepMacro, Inc.



5. 美联储是否正在丧失可信度?
Is the Fed losing credibility?



Markets are consistent with the Fed's long-term goals (as per Figure 1a), and other market variables (such as the dollar) are not sending strong warning signs of lower credibility.



But according to the STR-1 model, the rates market is paying less attention to the Fed. Figure 5a shows the top drivers of interest rates according to the STR-1 model. Each icon represents 10 "tree" models within STR-1's random forest model, and the number near the shaded icons (which appears when one hovers over the deepmacro.com website) indicates how many of the 100 tree models select the specified feature as an important driver of rates.



The central bank communications indicators are not selected by many models -- only 9 select the CBBI-Inflation index. This compares to higher numbers of models selecting the DeepMacro growth factor as an important driver. So even though the Fed is sounding hawkish, the market is paying less attention to Fed rhetoric than it is to hard data.



This does not necessarily mean that the Fed has lost credibility. But not listening to the Fed is one step toward not believing the Fed.


图5a. DeepMacro美国短期利率模型STR-1概要,最近(纽约时间2022年3月19日晚8:50)及之前四周(单位如示)

Figure 5a. DeepMacro US STR-1 Model Summary, Latest (19 Mar 2022 8:50 PM NY Time) and Trailing Four Weeks (Units as Indicated)

来源:DeepMacro, Inc.