The dots that the FOMC members contribute to the plot indicate their expectations for the federal funds rate.
Technically, it’s what they think rates should be, not a prediction of what rates will be on those dates. Is that a forecast? You can call it whatever you like. I think “forecast” is close enough.
But before we analyze the whatever-you-call-it, let’s look back at the not-so-distant past.
A 5% risk-free return
Here’s a rate history of the last 16 years:
I’ve highlighted this fact before, but it’s worth mentioning again: In 2007, less than a decade ago, the fed funds rate was over 5%. So were the interest rates for Treasury bills, CDs, and money market funds.
People were making 5% on their money, risk-free. It seems like ancient history now, but that year marked the end of a halcyon era of ample rates that most of us lived through.
The chart below shows historical certificate of deposit rates—but remember, you could put your money in a money market fund and do better than the six-month certificate of deposit yield, back in 2007.
Today’s young Wall Street hotshots have never seen anything like that. To them, the jump from 0.5% to 0.75% must seem like a big deal. It’s really not. If the chart above were a heart monitor readout, we would say this patient is now dead and that last blip was an equipment glitch.
The point to all this is that these near-zero rates to which we have all adapted are by no means normal or necessary to sustain a vibrant economy.
We’ve done fine with much higher rates before. They are even beneficial in some ways—they give savers a return on their cash, for instance. But there are likely to be consequences once we embark on this rate-increase cycle.
The FOMC cast members are all old enough to remember those bygone days of higher rates as well as I do. So, we would think they might at least foresee a return to normalcy at some point in the future.
The FOMC members see nothing of the sort
Here is the official dot plot published by the FOMC. (I have included their preferred heading so that no one complains about my calling it a forecast, even though that’s what it is.)
Each dot represents the assessment of an FOMC member. That group includes all the Fed governors and the district bank presidents. All 17 of them submit dots, including the presidents of districts who aren’t in the voting rotation right now. There would be 19 dots if the two vacant governor seats had been filled.
That flat set of dots under 2016 represents a rare instance of Federal Reserve unanimity: They all agree where rates are right now. (See, consensus really is possible.) The disagreement sets in next year. For 2017, there’s one lone dot above the 2.0% line, but the majority (12 of 17) are below 1.5%.
Nevertheless, it will be a much different year than this one if they follow through. The dots imply that the fed funds rate will rise a total of 75 basis points next year.
Presumably, that would be three 25 bps moves, but they can split it however they want. They could ignore their expectations completely, too. This time last year, the FOMC said to expect a 100 bps rise, or four rate hikes, in 2016. We got only one.
Follow the dots on out and you see that their assessments trend a little higher in the following two years, and then we have the “longer run” beyond 2019. Most FOMC participants think rates at 3% or less will be appropriate as we enter the 2020s.
The most hawkish dot is at 3.75%.
Think about what this means
Today’s FOMC can imagine raising rates only to the point they fell to about halfway through their 2007–2008 easing cycle. They see no chance that overnight rates will reach 5% again. None.
Here is another view of the same data, that shows how the dots shifted.
Looking at each set of red (September) and blue (December) dots, we see only a slightly more hawkish tilt than we saw three months ago. The “Longer Term” sets are almost identical—two of the doves moved up from the 2.5% level, while the two most hawkish hung tight at 3.75% and 3.50%.
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