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Memo to Bond Market From Fed: You Were Right on Interest Rates

The central bank's interest-rate projections are moving closer to market expectations
Janet Yellen this week.

Janet Yellen this week.

Photographer: Andrew Harrer/Bloomberg *** Local Caption *** Janet Yellen

Federal Reserve policymakers are coming around to the bond market's wisdom about where interest rates are headed.

Futures traders have been signaling for more than a year that when the Fed begins raising target rates for the first time since 2006, the increases won't be fast or reach the levels central bank officials predicted. For the second time this year, the Fed's policymakers lowered their rate projections in official forecasts released Wednesday.

"The Fed is giving you expectations, and the market is giving you reality,'' said Todd Colvin, a senior vice president at Chicago's Ambrosino Brothers. "The Fed has been a little bit optimistic about economic growth and has had to now come closer to the market.''

The chart below shows Fed officials lowering their forecasts for short-term interest rates at the end of 2016 (the colored arrows), thereby moving closer to the level indicated by federal funds futures (the blue shaded area).

While the Fed kept its end-of-2015 rate projections unchanged Wednesday, they also appear to be converging with market expectations.