Why Everyone Will Be Looking for the Fed's New Dots Today

Markets will seize on any hints of interest rate-hike timing

Dot Plot: What to Expect From the Federal Reserve

When Federal Reserve policy makers announce their decision on interest rates Wednesday, the first thing everyone will be looking for is the dots.

The dots — interest-rate projections from each of the 17 members of the policy-setting Federal Open Market Committee, prepared once per quarter — will show how many times officials expect to raise their benchmark federal funds rate this year. It's been pinned near zero since 2008.

The projections will also give us a sense of what policy makers currently have in mind for next year. In March (the last time officials submitted new dots), the median suggested a fed funds rate between 0.50 percent and 0.75 percent at the end of 2015, and a rate between 1.75 percent and 2.0 percent at the end of 2016 — implying two rate increases this year, and five next year.

In March, only three of the 17 committee members thought the Fed should raise rates less than two times this year.

Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, will be looking out for any changes. If six or more officials now make the same call, it could signal Yellen’s inner circle views a first move in September as less likely, according to Feroli.

Futures markets imply a 63 percent probability that the Fed raises rates twice this year, and give similar odds that policy makers' March forecast for 2016 also turns out to be right.  

The chart shows the FOMC's dot plot, overlayed with blue lines illustrating how the median official's fed funds rate projection for the end of each year has evolved over the last three quarters, and a red line showing current market pricing of the future path of rates.
The chart shows the FOMC's dot plot, overlayed with blue lines illustrating how the median official's fed funds rate projection for the end of each year has evolved over the last three quarters, and a red line showing current market pricing of the future path of rates.

Officials also release a "longer run" dot, which denotes their estimate of the U.S. economy's natural rate of interest in the long run, or the rate at which monetary policy would be neither too loose nor too tight. The median longer-run dot serves as a proxy for how high Fed officials think they will eventually raise the rate.

In March, it was 3.75 percent. Only one of the 17 members would have to lower his or her estimate for the median to fall to 3.5 percent.

In the past, Fed Chair Janet Yellen has downplayed the importance of the dots, but with liftoff seen as only months away, they might be one of the best indicators of what central bankers are thinking right now with regard to interest rates.

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