"Cheerleader" Fed Loses Credibility: Big Funds No Longer Trust The 'Dot Plot'

Tyler Durden's picture

For the past four years, bond traders have quickly turned their focus after Federal Reserve meetings to something called the dot plot (seen as a key insight into their collective thinking on rates). The problem is, as Bloomberg exposes, the forecasts weren't very good... and fund managers are increasingly ignoring the dot plot for investment decisions, as one strategist exclaimed "we don’t put a lot of credibility in the dots, [officials] have usually been cheerleaders for the economy, and they get turning points in the economy wrong."

The waning influence of the Fed’s projections is showing up in derivatives markets. After the December revision to the projected path of interest rates, traders responded much less than they did earlier in the year in the market for derivatives known as overnight-indexed swaps.

 

As Bloomberg reports, market reaction to changes in the dot plot, once pronounced, has become more muted in recent months and investors at firms including Pacific Investment Management Co., BlackRock Inc. and Aberdeen Asset Management say they won’t take the Fed’s projections at face value when they’re updated Wednesday at the end of a two-day policy meeting.

If the Fed is aiming to prepare the market for three or four rate increases this year, after officials in December projected four, traders aren’t buying it.

 

“We always thought four hikes was an aspiration, not a forecast” for this year, said Richard Clarida, New York-based global strategic adviser with Pimco. “If you ask me, ‘Rich, would you like to play third base for the Yankees,’ I say yes. If you ask ‘Rich, will you play third base for the Yankees,’ I say no.”

 

Aberdeen’s Maldari said he started questioning the economic projections in Fed statements in July, when the central bank inadvertently released confidential staff economic projections that implied rates should rise to 0.35 percent by the end of 2015, rather than the 0.625 percent implied in the most recent dot plot at that time.

 

“That tells me they are thinking one thing and saying something else,” he said.

Either way, as investors prepare for the Fed’s March 15-16 meeting, they think the policy statement and Fed Chair Janet Yellen’s press conference will attract most of the market’s attention. Clarida, of Pimco, expects the median Fed official’s projection will be for three interest-rate increases this year.

“Almost certainly, the 2016 dots will shift down,” Clarida said.

 

But “if they mark down 2016 to one hike, that would be a surprise. It would also be negative for stocks and credit spreads,” since investors would take that as a sign the economy is weaker than expected.

Good luck tomorrow Janet.

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Insurrexion's picture

 

 

Not only does the Fed lack credibility, include the ECB, BoJ, and BoE.

The Fed is afraid of Trump.

Here is a great article on what they will do to him if elected:

https://www.linkedin.com/pulse/americans-angry-trump-only-symptom-john-m...

knukles's picture

I'm just a little fund (Mrs K and the kiddies treat me like the Central Bank of Dad) and I never ever in 40+ years of doing this crap, ever believed a Fed forecast, except that it was the forecast made by the BOG's staff.   Their track record has never been "admirable" to say the least.

Richard Chesler's picture

Why would the all joo fed fuck their all joo big hedge buddies?

 

blue51's picture

You forgot to mention, that that was just a statiscal observation.

Vlad the Inhaler's picture

I predict another violent coughing fit.

Soul Glow's picture

They'll raise tomorrow.  25 bps.  Range will be between .50 and .75 for the next three months.

knukles's picture

Betcha they don't do a thing.  Other than yacketty yack.  And Janet's proven she can fuck that up as well.

Zero_Ledge's picture

I agree they raise tomorrow.  I think the odds are slightly better than 50%.  The market thinks the odds are 2%.  Should be interesting either way.

For me this is the ultimate test of whether they are "data dependent" or market dependent.  I know many believe they have been market dependent for 30 years, but this time will seal the deal.  Jobs and inflation data for the last 3 months have been exactly as the Fed forecast - slow but steady increases.  According to their own rules they ought to raise.  If this amount of mild market weakness is enough to stop the ramp, it's game over for the Fed.

Miraculously, I believe Fischer somehow persuades Yellin to stop being the market's bitch...

Disc Jockey's picture

For me this is the ultimate test of whether they are "data dependent" or market dependent.

LMAO. Shit bro, you should get a spot on Comedy Central.

Wild Theories's picture

so we are now guessing between 2 or 3 hikes this year? 4 is too much, 1 is losing cred, but where is "just right"?

while we are searching for goldilocks, how about tuning that 25bps, 25 per raise is just so cut and dried and boring, can we have a 15bps  or 10 bps raise instead?

honestann's picture

They haven't raised yet... they just pretended they did.

Element's picture

Listening to the golden donkey on TFM metals podcast.  lol

honestann's picture

Golden donkey?  What's that?  I'm just looking at short-term bond prices.

Actually, I don't recall the fed wording, but 0.25% is within the range 0.00% to 0.25% AND 0.25% to 0.50%.  So maybe the federal reserve didn't actually say they raised... really.

Eternal Optipess's picture

I prepare for the release of a Fed meeting's decision consistantly. I take a big old whopping crap and go to work. Metal is money.

Not Goldman Sachs's picture

The line on the graph should be flat or curving downwards, not up. Ole yellar would like to raise, but alas will only jawbone tomorrow. The next meeting, blah, blah, cough, cough, choke..,.

timehill's picture

So, the best and brighest from Harvard, Stanford, Cal, MIT, Wharton, etc. ,etc. have bought in to this bull shit for seven years, why should they stop now????

 

They, you, are all sheep. 

 

So sad!  You were suppose to be the intellectual elite and you are just sheep!

 

Please, don't tell your kids or your grandkids of how you sent this country down the river for that wonderul house in Stamford, which you actually cannot afford!

Theonewhoknows's picture

FED? I think they need a crisis to prove that they were right - soon they will start tellig the story of how bad it is - and through disruptions wil cause their desired, engineered crisis. THEN FINALLY they will be right. http://independenttrader.org/century-of-enslavement-the-history-of-the-federal-reserve.html

timehill's picture

Sorry....but can anyone put this in to perspective?

In 1978-80, residential rates were 18%, commercial 23%, and AA-AAA bonds were 12-14%.

And........were are convulsing over a .25% increase.

Can anyone spell disaster in the American economy.

Please get real or, at least, sober.

Obviously, the FED can get neither!

yogibear's picture

The Fed can go F itself. Guess it already has.

 

Loucleve's picture

As Bloomberg exposes?  Bloomberg exposes nothing without a reason.

"we don’t put a lot of credibility in the dots, [officials] have usually been cheerleaders for the economy, and they get turning points in the economy wrong."

And you are doing what, differently?