Vast differences on Fed funds rate 

Fed funds futures, which reflect the market’s bet on the future path of the US policy rate, implies that there will be only two rate increases through 2019, one in 2018 and another in 2019, and that the Fed funds rate will remain comfortably below 2 per cent for several years. 
The yield on US 10-year Treasuries fell to 2.15 per cent, the lowest level since last year’s presidential election, as a result.
The Fed itself, at its last meeting on Wednesday, just reiterated its plan to raise the rate seven times to 3 per cent by the end of 2019. 
The world’s largest central bank also confirmed its plan to start draining the liquidity injected into the system over the past several years through its quantitative easing programmes.
The stark difference between market expectations and the Fed’s projections reflects complacency in the bond market, which could pose a serious threat to the stock-market rally. 
Global stock markets have ridden the wave of low bond yields to set record highs in the past several months. Going forward, they could come under pressure if bond yields begin to rise again. 
A Tisco study shows that in the past Fed rate-increase cycles, the price-to-earnings ratio of the US stock markets declined by 15 per cent on average in the second year after the first rate rise. In this cycle, which started when the Fed first raised the interest rate in December 2015, however, the P/E of the S&P500 has risen by 12 per cent, thanks to persistent low bond yields. 
Stock markets are expensive by many measures and valuations will have to come down at some point as the Fed raises borrowing costs and starts to withdraw liquidity from the global financial system.

KOMSORN PRAKOBPHOL is head of strategy at the Tisco Economic Strategy Unit. He can be reached via www.tiscowealth.com or [email protected].