economics

Wall Street Persists With Fed Dot Obsession: Decision Day Guide

  • Fed chairman brushes off dot plot but investors beg to differ
  • Economic forecasts and Powell press conference to yield clues
Fed Must Be Willing to Show International Responsibility, Says Redeker

Federal Reserve Chairman Jerome Powell has repeatedly played down the central bank’s “dot plot” as a guide to future interest rates, but Wall Street just won’t take the hint.

While the Federal Open Market Committee is almost certain to raise rates a quarter point at the close of a two-day meeting Wednesday, investors are focused on whether the panel will signal one or two additional 2018 hikes when it releases updated interest-rate forecasts with the policy decision at 2 p.m. Powell will begin his press conference 30 minutes later.

The FOMC was about evenly split in March when it projected three hikes this year, so just one participant switching to four hikes could shift the median of the committee. Accelerating growth and inflation rising to target might argue for a more aggressive tightening, while lackluster wage increases and fragile emerging markets would suggest caution.

Policy makers in March saw three to four rate hikes this year

“The market will be focused on 2018 dots,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. “It is a close call. I’m leaning toward four but without much conviction. The FOMC is really focused on the language but I think that will be overshadowed by the dots.”

Powell advised investors in his March press conference not to focus too much on the dots. Asked about its projections for 2020, he said policy makers “don’t have the ability to see that far into the future.” That echoed his 2016 view when he pointed to “shortcomings” in the dot-plot.

Economists surveyed by Bloomberg predict the FOMC will stick with its March prediction of three hikes this year in the updated quarterly forecasts.

Even so, “there is a risk that the dots go up a tad, not down,” said Steven Ricchiuto, chief U.S. economist at Mizuho Securities. “All you need is for one to change. There has been enough strength in the economy” to tilt to more tightening.

The Summary of Economic Projections could see other changes that reflect mostly upbeat economic data since March. Forecasts could show higher 2018 growth, lower unemployment rates and possibly slightly higher inflation, said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC.

The committee will also debate the language in its policy statement. Minutes to the last two FOMC meetings showed officials have begun to discuss changes reflecting that policy is moving closer to neutral rather than still being characterized as “accommodative.”

“I’d expect this part of the statement to be softened to something like ‘somewhat accommodative’ or perhaps even dropped,” said Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore and a former Fed economist.

In the press conference, journalists are likely to ask Powell about softening global growth and emerging markets struggling with higher U.S. rates. Currencies of such nations have been hammered in a spreading selloff amid worries that their economies won’t cope with higher U.S. borrowing costs.

What Our Economists Say

The Fed is due to hike interest rates for the seventh time of the cycle at the June meeting. This is broadly anticipated by market participants, so execution should be relatively smooth and uneventful. Any market reaction is more likely to be related to changed expectations for future policy as officials are due to update their economic and financial forecasts. The Fed has been resolute in terms of not overreacting to evidence of rising inflation and mounting labor scarcity, and this is likely to be expressed in its forecast updates, as well.
-- Carl Riccadonna and Niraj Shah, Bloomberg Economics

“The tone of the press conference will be important,” and Powell will likely strike a balance, “not eager to raise faster or slower,” said Roberto Perli, a partner at Cornerstone Macro LLC in Washington.

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