Fed Model? from Rocky Humbert

February 25, 2010 |

Nobody uses, or even mentions the Fed Model any more.  — A Reader.

Not so fast. Verbatim from the latest minutes of the FOMC:

"The gap between the staff's estimate of the expected real equity return over the next 10 years for S&P 500 firms and the real 10-year Treasury yield — a rough gauge of the equity risk premium — stayed about the same and remained well above its average level during the past decade."

I use several different "Fed Models" in my equity portfolios. One similar to Ed Yardeni's Fed Model suggests a US stock market risk premium of around 6.8%.

Anton Johnson adds:

This reminds me of the ongoing debate whether to use historic or estimates for the Fed Model earnings and/or interest rate inputs. Although aggregate consensus earnings estimates for the S&P 500 stocks can fluctuate markedly, a compelling case can be made that an estimate based model is more adaptive. Accordingly, I use estimated data in my version of the Fed Model, which is currently projecting a 11.7% return for the next 12 months.


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