Even the Fed can’t predict Fed actions

David MoonBlog

If the people responsible for setting interest rates in the U.S. can’t successfully predict interest rate changes, then you don’t have a chance at being able to do it. And neither does anyone else, including presumably really smart people who get paid a lot of money to predict such things.

When the Federal Reserve left the target for the Fed Funds rate unchanged at its most recent meeting, it also signaled that it expects to cut rates only once this year, most likely either the day following the November 5 presidential election or at its December meeting, a week before Christmas.

That is, unless it does something else.

Only three months ago, the Fed anticipated cutting rates three times this year. Three months before that, In December, the Fed projected six rate reductions in 2024, each by a quarter point. Instead, rates have remained unchanged for more than a year.

At its June meeting in 2023, the Fed also left interest rates unchanged, but indicated two possible rate increases in the second half of last year. One of the members of the Fed Open Market Committee predicted that the Fed Open Market Committee would increase rates four times in the last six months of 2023.

I don’t know which of the 12 committee members made that prediction, but he/she should have his forecast privileges suspended for a while.

The Fed’s interest rate decisions are mostly irrelevant anyway. The Federal Reserve seems more influenced by changes in market rates of interest than it is able to influence them. In the past 12 months, while the Fed Funds rate has remained unchanged, rates on Treasury bonds, home mortgages, car loans, bank CDs, and credit card rates have all increased.

I’m not suggesting whether or not the Fed should be cutting rates. I’m trying to dissuade you from thinking that you or anyone else can accurately predict what the Fed is going to do. Interest rates are important – one of the most important variables in all of finance. Rate increases can wreak havoc on borrowers. Lower rates increase the value of most cash flow assets. In the extreme, artificially low rates affect people’s risk decisions, seducing investors to take inordinate risks in hopes of producing tolerable returns.

But just because interest rates are important doesn’t mean that you can predict them.

Warren Buffett’s long-time partner Charlie Munger once noted that in 50 years of working together, neither of them ever asked the other his prediction about the next Fed move prior to making an investment decision. It seems to have worked out okay for them.

David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.