Buried in the blizzard of information that the Fed released Wednesday was a dot-plot of all of the Fed officials’ predictions. And while Janet Yellen did a fine job in her first press conference reiterating how future Fed actions are data-dependent, market participants were able to compare what the Fed is thinking now versus what they thought three months ago.
The dot-plot places a mark where each official projects the Fed Funds rate to be at the end of 2014, 2015, 2016, and in the long-run. And since the Fed is currently removing its extraordinary stimulus—tapering—it’s natural to wonder when they might start returning short-term interest rates to normal. The dot-plot gives us a convenient picture of what the Fed thinks.
And what do they think? Most Governors and Presidents think that rates will be at 1% by the end of 2015, and 2% by 2016. Long term expectations are unchanged from December, at 4%. But their short-term projections are about a quarter of a percent higher.
While Yellen is correct when she insists that “it depends what conditions are like” as to when the Fed will begin tightening, it’s also true that the dots show a more hawkish Fed than the market expected. So while the Chair may have been trying to sell a more dovish picture, the market wasn’t buying. When she told the press-gathering not to look too closely at the dot-plot, I thought: “The lady doth protest too much.”
The Fed has changed its communication strategy from Greenspan’s “creative obfuscation” to its current “blinding transparency.” Fed watching has always been an art. These charts make it a little more of a science.
Douglas R. Tengdin, CFA
Chief Investment Officer