Suppose you watched the TV weather forecast last night and were asked whether it would rain next year. Would you know what to say?

We wouldn’t either.

But it’s an analogy that comes to mind after a report was published on the ability of financial professionals to predict where interest rates will be in the future. To no one’s surprise, their track record on interest rate forecasts is described as “dismal.”

Why interest rate forecasts are wrong

Interest rate forecasts: A growth industry

Anyone who follows financial news has seen or heard pundits who claim to know what the Fed will do and when. And they go even further, opining on the fallout from their predictions and what investors should do next.

Though it’s a provocative exercise, the predictions are invariably off the mark and prove costly to investors who follow them.

For example, a 2014 study among financial advisors found 79% believed rates would spike – and changed their portfolios to accommodate their predictions. Unfortunately for their clients, the 10-year Treasury rate went in the opposite direction, falling almost 30%.

What’s wrong with these predictions, and the more ubiquitous ones investors hear regularly from talking heads?

One adviser attributes it to a misunderstanding of the Fed’s role. The Fed, he correctly points out, only controls overnight rates, not long-term rates.

Consider that at the end of 2014, the Fed funds rate was .09%; by March of 2019, it stood at 2.4%. So short-term rates increased, with one-month Treasury bills rising from .03% to 2.44%. But that steep increase did not translate into a similar increase in longer-term yields. Actually, the yield curve was flattening.

Focus on what’s known, not guesses

As we’ve pointed out many times (for example, here and here), forecasting doesn’t work. Interest rate moves, or even the perception of possible changes, are often misconstrued by the media, less-experienced investors and, sadly, a number of financial professionals.

Fortunately, successfully investing in municipal bonds doesn’t require a crystal ball. When funds are available, focus on what is known to find the munis that most suit your financial objectives.

For entertainment value, interest rate forecasts are harmless. But as financial guidance, they’re best ignored.

James A. Klotz is the President of FMSbonds, Inc. Email the Author04/04/2019