Conforming to Expectations

“When everybody is thinking alike, then somebody isn’t thinking.” – George S. Patton

Source: Wikipedia

Last week I noted that the Fed’s dot-plot gives us a picture of where each Fed governor expects short-term interest rates to be one, two and three years from now. The chart is interesting because it’s fairly new. September’s dot-plot is only the fourth set of projections we’ve seen.

And it shows a pretty wide dispersion. In two years, one Governor thinks overnight rates will be at 4%, while another thinks they’ll almost unchanged, at 0.25%. But while the dot-plot is new, the Fed has been publishing a summary of economic projections for a while. And these have diverged a lot more in the past.

Source: New York Fed

What’s striking about the latest disagreement is that while the Fed’s hawks and doves have widely divergent opinions, economists and analysts largely don’t. Most folks on Wall Street think the Fed will start raising rates sometime in June.

Why does the Fed disagree when the Street agrees? One reason is because they can. Fed Governors have different assessments of the economy, different economic models, and different constituencies—they’re pretty independent from one another, and serve long appointive terms. Some Fed Presidents have been on the Board of Governors for over 30 years.

By contrast, Street economists serve the broad community of institutional bond market investors. When they make their projections, they tend to herd together. They read each other’s research, and it’s safer to be conventionally wrong than unconventionally right. Write and “out-there” piece, and you might be invited to have a discussion with the head of Human Resources.

Which is why I like reading Fed research. Not only do they have hundreds of Ph.Ds. on-call looking at interesting questions, but they’re fairly free to collegially disagree with one another.

Disagreement breeds wisdom. As noted above, when everyone thinks alike, someone isn’t thinking.


Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
Leave a comment if you have any questions—I read them all!

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