Fed Now Sees Only Three Rate Hikes Thru End Of 2017; Cuts Long-Run US GDP Potential

While the Fed's dot plot, which last December predicted four rate hikes in 2016, has lost virtually all credibility, there are those who still keep track of its as a forward guidance indicator. So here is what it said:

  • the median target for end-2016 is now 0.625% vs 0.875% in June, with three Fed members expecting no more rate hikes in 2016
  • the median target for end-2017 is 1.125% vs 1.625% in June
  • the median target for end-2018 is 1.875% vs 2.375% in June
  • The 2019 median dot debuts at 2.625%
  • The Long-run target falls to 2.875% from 3%

As a result of the revised dot plot, the Fed now sees one rate hike in 2016, supposedly in December and only two rate hikes next year, down from their June median projection of three. Also  as r-star continues to plauge the Fed, the long-run interest rate is now seen at 2.875%, down from 3.0% three months ago.

Here is the comparison of the June and September dot plots:

 

And Bloomberg's overlay of the June and September dot plots.

 

Just for entertainment purposes, here is the December 2014 dot plot compared to the latest, September, one:

In addition to the dot plot, the Fed provided its long-run projections, which now see 2016 GDP rising 1.7-1.9% compared to 1.9-2.0% previously; but what's more troubling is that the longer-run GDP forecast has been cut from 1.8-2.0% to 1.7-2.0%, suggesting that the Fed continues to see deteriorating to the longer-run potential of the US economy.