When the Federal Reserve speaks, the world’s financial institutions listen, and for good reason. Fed policy drives not only global financial markets but also the policies of other central banks. Therefore, any insights into the Fed’s thinking are worth paying attention to.
One area that has been getting a lot of attention recently is the Fed “dot plot.” When the financial press talks about it a lot, many individual investors don’t know what it is.
What Is the Dot Plot?
The dot plot is published after each Federal Open Market Committee (FOMC) meeting. It shows the projections of the 16 members of the FOMC, which is the rate-setting body within the Fed. The Fed began publishing them under former Chairman Ben Bernanke in January 2012.
Each dot represents a member’s view on where the fed funds rate fed funds rate—the rate at which banks with balances held at the Federal Reserve borrow from one another an overnight basis–should be at the end of the various calendar years shown, as well as in the long run—the peak for the fed funds rate after the Fed has finished tightening or “normalizing” policy from its current levels. The dot plot represents the Fed’s ongoing effort to become more transparent with respect to its policies.
Following the FOMC’s March meeting, its members’ average expectation is for rates to hit 2% to 2.25% by the end of 2018, and possibly as high as 2.75% in the long run. The current target for the fed funds rate is 1.25% to 1.50%. Rather than focusing on the absolute number for the FOMC members’ projections, the more important consideration is the direction of movement. Generally speaking, investors want to know whether the FOMC is leaning toward looser monetary policy and reducing rates, or tighter policy, which would mean rising rates.
The current dot plot includes projections for 2018, 2019, 2020 and longer term. It’s expected that the federal funds rate will sit at about 2.1% by the end of 2019.
AAII Weekly Survey Question
While the dot-plot is intended to increase the Fed’s transparency, not all Fed members think they are overly useful. That includes new Fed Chairman Jerome Powell.
In his first press conference since taking over as Fed chief, Powell advised investors against reading a lot into the central bank’s dot-plot projection for interest rates in 2020, saying policymakers “don’t have the ability to see that far into the future.” According to Bloomberg, Powell also minimized the significance of the economic forecasts that form the backdrop for the Fed’s rate expectations, noting that they were predictions of individual policymakers and not sanctioned by the FOMC.
The Bloomberg article added, however, that Powell is not the first Fed chief to complain of the market’s focus on the dot plot. In her first press conference as Fed chair in 2014, Janet Yellen cautioned against looking to the projections for guidance on Fed policy.
In light of Powell’s comments regarding the Fed dot plot, last week’s AAII reader survey question asked:
How much weight do the Fed’s interest rate projections carry in regard to how you invest or what you invest in?
Here are the results:
In all, 1,855 readers participated over the holiday-shortened week.
The majority—albeit slight at 54%—of readers only place a slight amount of weight on the Fed’s interest rate projections when making investment decisions.
A little more than a third—34%—say they don’t place any weight on the Fed’s interest rate projections when deciding how to invest.
Only 12% say the Fed’s interest rate projection play a significant role in how they invest or what they invest in.
Weekly Special Question
Since the state of the economy, and more specifically the expected direction of the economy, plays an important role in the Fed’s monetary policy, last week’s AAII special survey question asked:
How confident are you in the Federal Reserve’s ability to assess the economy and the forces affecting it?
Overall, we received 214 responses to the question.
Overall, the responses fell into four broad categories:
- No or limited confidence (50.4%)
- Confident (28.5%)
- Somewhat confident (18.7%)
- Not sure (2.3%)
Here is a sampling of the responses readers offered regarding the best ways to ensure that financial professionals act in their clients’ best interest:
- “I am not confident in the new chair and unknown board member. They have no history with me.”
- “Not confident that the Fed’s ability to assess the economy with Trump as President.”
- “There is no way to tell if the country would be better off without the Fed’s meddling in the economy. Although their track record is not very good, it could have been worse.”
- “Are you kidding? Zero, zilch!”
- “Better than Congress (which has none), but not by much.”
- “Fed has been very good with foreseeing the next 12 months. Longer term is too much to expect.”
- “The Fed is part of the problem, not the solution. The other part of the problem is the government.”
- “Low to moderate confidence. Fed is the tail wagging the dog.”
- “[The Fed] understands the past very well, it’s the future that gives them trouble.”
- “Jerome Powell told the truth when he said that policy makers ‘don’t have the ability to see that far in the future.’ You can twist yourself into pretzels trying to ‘read’ the dot plots but you can not see that far into the future either.”
Everybody has an opinion! Why not give us yours? Participate in our weekly member poll, updated every Monday, and see the results online at www.aaii.com/memberquestion.