What You Need to Know About Federal Reserve Dots

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June 16 (Bloomberg) -- David Zervos, chief market strategist at Jefferies and Bloomberg’s Michael McKee examine what there is to be learned from the “dot plot” used by the Federal Reserve to determine sentiment on interest rates and how markets react to changes in FOMC opinions. They speak on Bloomberg Television’s “Market Makers.”

The fed is not expected to make any change in policy.

The question is when they make a change and that's where the.

Plot comes in -- dot plot.

They would release a chart that suggests when they think they will first raise rates and how far they will go during that year.

The big deal in march was from december until march, the dot plot moved into 2015 up in the 2016 numbers moved up.

Which says more members of the fmoc - if you look at 2015 and count the dots - there is 16 dots there and 19 members of the fmo see and ben bernanke had resigned and there were two open seats.

The fact that mode, you had different people in their roles and you had shortages of people so the numbers changed.

Do they meet anything?

Janet yellen says is a picture of what we think will look like at the end of the year.

The markets took it as a forecast and bonds sold off and yields went up.

That's part of the communication strategy problem they have.

They will release a new dot chart on wednesday.

What will it tell you with three new voting members?

Do you likedots.

I like dots and specific time periods.

When we run out of things to do, the dots are helpful.

As we progressed to a more normalized monetary policy and away from our very abnormal state come you could argue that the dots become too much information and the fed has expressed a desire to create some volatility around the expectations.

Maybe this will create some of those problems that we had in the housing area.

They are's desk they are stuck with them right now.

Whether that wanes over time because the communication becomes more difficult, i don't know.

I like them i think the market likes them now especially as we try to figure out what these guys will do next.

Let's bring it back up again.

I think the most important part of this chart is to the far end, the long run.

The fed has been debating internally whether the long-run equilibrium rate is lower.

You saw larry summers make a comment last november at an imf conference suggesting the long run equilibrium funds rate might be -2 instead of +2. and that's different where the fed thinks it will go.

I don't think everybody is moving to this but a lot of people are floating around with stories of new normals and stagnation and demographic stories.

There is more demand for risk-free assets.

That may be this equilibrium rate.

What could be interesting is that we see some of those longer run dots drop a bit as people begin to become more mainstream with their view and away from the traditional view.

I think that would be a positive sign for the equity market in a positive sign for the long end of the bond market but it might not be a good sign for the front end of the bond market.

I think that is what to watch for.

The rest of it is the individual dots.

You don't know who's dot is where.

It does not really matter what they think.

Many people have suggested they should start attaching their names to the dots and some of them have said this is where i am but they have not done it as a group.

As of recently, people have started to talk about this be nine period for economic policy and market performance.

Is that something janet yellen likes?

I think she would be neutral.

Why would she be neutral?

The first moderation turned out to be -- it depends on why.

People -- if people attribute that to the fed, she would not like that.

Moderating policy is not the feds mandate.

Things like demographics and things like that, lower real funds rate, it's hard to say there is one pacific -- one specific reason the fed did it.

The fed took responsibility in the 1990's and they took a lesson from that.

I don't think there is any desire to declare victory on inflation or declare victory on the crisis.

The good news is that at least now arafat has a little less hubris that had precrisis.

I think that something you will see them shy away from which is good news.

The big question is how the party comes to an end.

Under these kind of conditions, you are getting paid to take risk by that at a certain point, things will change.

There'll always be a point where things will change.

I am still looking at a world where virtually every major central bank is diluting the value of their currency and increasing the amount of the risk free assets out there.

Traditionally, we were encouraged if we wanted to not seek risk is going to treasuries or cash.

That is what's being diluted every day.

What we have today and have been arguing with their clients about is the asset that is the safest is the asset that cannot be diluted by the feds printing presses.

We have advocated for the asset it the best asset is not gold which does not give you a great return of the long run but does protect you from inflation.

Real assets mining equity capital and capital of individual companies that actually make stuff.

What of the bank of england raises rates before the end of the year and the fed ends qe - everybody might just head for the exits because we have changed direction.

There is a big risk in that.

We moved rates higher last year and we had normalized team premiums in the market.

They could be more aggressively moved in the future people get nervous but it gets back to the equilibrium concept on the fed will go out of its way to try to indicate to us that the path by which they will operate will not be a 1994 path or a rate hike path.

They will try to remain as calm as they possibly can.

That will be hard to do and that's why everybody understands that this experiment in monetary policy is one that will probably create some very complicated times for the fed and complicated for the market.

For now, we sit in the sweet spot of very little inflation pressure and reasonable growth in most central banks are doing the same thing.

The flak -- the slack in the economy still seems to be there.

This will make the equity risk premium very high and premiums very cheap.

This has by the sign then a

This text has been automatically generated. It may not be 100% accurate.


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