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Market expectations are dismal




As we wait for the Fed to tell us that not much has changed and they expect to keep rates low for a long time, I thought it would be interesting to show what market expectations are for future Fed actions. This chart shows the expected Fed funds rate one year in the future (using the one-year forward futures contract on Fed funds). Today the expected rate for Sep. '11 is 0.3%, which means that the market is not really expecting any chance of a tightening in monetary policy for the next year.

To my mind, this is characteristic of a market that has very little hope for an economic recovery, and very little concern about rising inflation. It is also the least optimistic view of the future that we have seen since before the recent recession started. This market is braced for bad news. In the absence of bad news, risky asset prices would likely rally.

UPDATE: With the FOMC's statement suggesting that the Fed continues to believe that the economy is on a slow path to recovery (i.e., the Fed is not panicking), equity prices have rallied.

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