Why the market is losing its faith in the Fed

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Market losing faith in the Fed

As the Federal Reserve prepares to exit its monthly money-printing program, it faces a thorny dilemma with a market that is not buying what the central bank is selling.

Fed watchers increasingly are commenting on a dichotomy as it relates to monetary policy—namely, the disparity between what the so-called dot plot is showing regarding individual Open Market Committee members' expectations for its target short-term rate, and what the market believes the actual path will be.

Specifically, the FOMC grid is indicating a more aggressive path than what the market is pricing in.

The dot plot shows FOMC funds rate expectations for 2015-2017 at 1.38 percent, 2.88 percent and 3.75 percent respectively. Market expectations, as judged by futures action, are for 0.45 percent, 1.35 percent and 2 percent, according to economists at Deutsche Bank.

In short, investors simply don't believe the Fed and instead envision a scenario in which rates rise much more gradually.

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