The Fed Reserve appears to be on the edge of a credibility problem: the market does not believe the central bank’s official forecast for interest rate policy.

For reference, the current Fed-controlled short-term interest rate is set at a range between 2.25% – 2.50%.

Below we show the Fed “Dot Plot”. Which plots the interest rate anticipated by each of the voting participants of the Federal Reserve system for several years out into the future. The green circles represent current Fed expectations as of the most recent March 2019 meeting, while white circles represent past September 2018 expectations. The larger the circle, the more Fed policymakers expect a given interest rate at that date in the future.

Note that for the remainder of 2019, Fed governors anticipate stable interest rates. For 2020, the Board anticipates one further interest rate hike, to a target range of 2.50% – 2.75%:

The Market Disagrees

Now let us examine the market’s own expectations for the same interest rates. Below we show futures pricing data for the upcoming Fed meeting, which is to be held this Tuesday and Wednesday in Washington, D.C.

Note that the market is pricing in a 98.0% chance of no change in interest rate policy, with a 2.0% chance of an interest rate cut, down to a target of 2.00% – 2.25%.

Let us recall that by the Fed’s dot plot, members are expecting stable interest rates for the remainder of 2019. Further, not a single member of the Board of Governors is pricing in the possibility of even a single rate cut.


Interest Rates by the End of 2019

Now let us now extend the futures market expectations out toward the end of 2019:

As we see, by the end of this year, the market is still not pricing in any rate hikes as suggested by the Fed, but rather is pricing in a 52.2% possibility of either one or two rate cuts. Such would put the short-term rate at either 2.00% – 2.25% or 1.75% – 2.00%.

There is thus a discrepancy between official Federal Reserve projections and market expectations.


Who Will Be Correct?

Of course, we cannot say ahead of time.

Yet our main concern is not so much who will ultimately be correct. Rather, our focus is on the existence of such a discrepancy in the first place.

As precious metals investors, we should be paying attention to times in which the sum of the market does not take the central bank at its word.

After all, the Federal Reserve is the controlling body of the fiat (Latin for “let it be so”) currency we refer to as Federal Reserve Notes or US dollars.

Dollars are, in essence, a token of trust in the soundness of the issuing body – the Federal Reserve itself.

Gold, of course, as the only time-tested reserve currency which is not fiat in nature, stands in direct competition to Federal Reserve Notes. This is why we often observe gold rising on days when the dollar falls in value, and vice versa.

Many precious metals investors, in fact, choose to own gold as protection. Against a decline in the purchasing power of their dollars.

We have maintained that the ultimate bubble which exists in the world today is not in any single asset class, but rather it is a bubble in faith in central banking itself as an institution.


Central Bank Failures Throughout History

We remind new readers that two central banks have already failed in United States history:

  • Congress yanked the First Bank of the United States’ charter in 1811 after 20 years in operation, and
  • Andrew Jackson refused to renew the Second Bank of the United States’ charter in 1836 after a second 20 years.

While we are not predicting that the Federal Reserve will be the third central bank in US history to fail. What we see above is the first sign of disbelief by the market in Fed intentions. During the present monetary tightening cycle, which began in 2015.

Could this be the initial signal of greater distrust to come in Fed policymaking?

Time will tell – however, this is an important first hint.

And distrust in the central bank is exactly what will fuel a precious metals advance over the long run. As confidence in not only the institution but in the institution’s notes (US dollars) is called into question.

Let us watch carefully over the year ahead as Federal Reserve interest rate policy increasingly comes under skepticism by the market.


Christopher Aaron has been trading in the commodity and financial markets since the early 2000s. He began his career as an intelligence analyst for the Central Intelligence Agency. 

Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy has helped his clients to identify both long-term market cycles and short-term opportunities for profit.

This article is a third-party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.

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