There is little doubt the Fed will raise interest rates by 75 basis points later today, its fourth consecutive increase of that magnitude this year. More important is that derivatives markets are forecasting that the Fed will keep rates elevated for quite a long time. The Wall Street Journal reported this morning that the five-year, five-year overnight indexed swap rate (which forecasts where the Fed Funds rate will be in the five-year period beginning in five years, making it a ten-year forecast) is forecasting a Fed Funds rate of ~3.5% over that period, a full percentage point higher than the Fed’s latest forecast. While ten years is an extremely long period to forecast rates accurately, this swap rate is considered a useful guide to the future course of interest rates and provides insight into the mind of the market. Investors are starting to come to believe that the Fed will not lower rates again anytime soon.
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