Students learning about commodity future prices will come across two terms that describe non-normal futures markets. Namely contango and backwardisation.
If the futures price is above the expected spot the market is in contango. And if the futures price is below the expected spot the market is in backwardisation. But how does this relate to Fed guidance?
After Federal Open Market Committee (FOMC) meetings, the Fed releases its Summary of Economic Projections (SEP). This reveals their official forecasts for Inflation, Employment and GDP. But also what the fed fund rate will be in the future and the terminal rate required to eventually bring inflation under control.
While a lot has happened these past two years, the phrase "inflation is transitory" will not have been forgotten. This was the period when the Fed (and the ECB and the BoE) were being accused by economists of being behind the curve. Their interest rate guidance was arguably in backwardisation.
Looking at the SEP reports over the past 3 quarters, it seems the Fed has shifted into Contango as their predictions for the fed fund rate and the terminal rate have shifted higher and higher to reflect the reality. Specifically, the September predictions for the the December fed fund rate is 4.4%. And for the terminal rate 4.6%. Which contrasts significantly from the March predictions of 1.9% and 2.8%, or 250 and 280 basis points lower than the September predictions respectively.
It seems as though Fed Guidance has moved from being behind the curve, to springing off the curve...at least that is the view of many economists in the research feeds inside RFPnetworks.
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