Following the last meeting of the policy-setting Federal Open Market Committee (FOMC) on 16-17 September 2015, the US Federal Reserve (the Fed) released its latest dot plot chart – a chart that (anonymously) shows where each of the 17 FOMC members think the federal funds rate will be at the end of the year for the next few years and in the longer run.
The dot plot chart has been released once every quarter since January 2012. It was introduced by the Fed as an element of ‘forward guidance’ to investors. ‘Forward guidance’ is a communication policy intended to increase transparency about a central bank’s thinking and thereby lower the risk of investors being caught off guard about the central bank’s monetary policy intentions (particularly important when policy rates are at or near zero). Currently, four central banks (the Fed, the ECB, the Bank of Japan and the Bank of England) have adopted new approaches to policy rate forward guidance with the aim of enhancing the effectiveness of monetary policy at the zero lower bound.
When the dot plot chart first saw the light of day, the Fed’s priority was to reassure markets that rate hikes were not on the agenda. The statement published after the FOMC’s meeting in March 2015 put the possibility of a rate hike (from 0 % to 0.25% – the fed funds target range since December 2008) back into play. The Fed’s priority since has been on reassuring markets that, while a rate hike may be coming, the path of the upcoming cycle of rate hikes will be relatively shallow – with a lower pace of rate hikes than during previous hiking cycles.
The dot plot is not intended to be an immutable roadmap of where policy rates are going. It’s simply a survey of each member’s best ‘guesstimate’ of what the fed funds rate will be in the coming years. Events may well lead members of the FOMC to change their view on the path of monetary policy. Members of the FOMC are of course human and therefore struggle with predicting the future as much as the rest of us do. So their views are best taken with a pinch of salt. Since the dot plot chart was introduced, the FOMC has been consistently over-optimistic in predicting how it will set the fed funds rate. Financial markets have accordingly been pricing the trajectory of future rate hikes below that outlined in the Fed’s dot plot chart.
So what does the latest dot plot chart tell us about thinking within the FOMC? Exhibit 1 below shows the dot plot released after the meeting of the FOMC in June 2015:
Exhibit 2: A more dovish Fed? The dot plot chart released after the FOMC meeting on 16-17 September 2015:
Source: Bloomberg, 25/09/15
The latest dot plot chart shows that the median FOMC member sees rates staying between 0.25% and 0.50% at the end of 2015 – that would mean just one rate hike in 2015, instead of the two the median member predicted in June. The pace of the rate hikes has not changed though: a rise of 100 basis points in 2016, followed by 125 basis points in 2017. The median FOMC member now sees the longer run policy rate 25 basis points lower than he did in June at 3.5%. The wider dispersion of the dots in September relative to June suggests a lack of consensus within the FOMC.
At the September meeting, one committee member even went so far as to put his or her ‘dot’ below the zero rates line – predicting negative policy rates at the end of this year and 2016. In other words, an expression of the view that more stimulus is needed to achieve full employment and get inflation back to 2% – the same individual foresees a policy rate in 2017 of only 1%.
During the press conference after the FOMC meeting on 17/09/15, Chair Yellen said that negative rates were not “something we seriously considered” at the current time, and added that the FOMC member in question was concerned primarily about the outlook for inflation.
The most hawkish forecast has not changed: close to 1% at the end of this year and close to 3% at the end of next year.