Mondial Chart of the Week 📈

Fed's Dot Plot

01 August 2021

 

What this chart shows The Fed’s ‘dot plot’ shows where each governor thinks interest rates will be at future dates. Each dot represents each individual members’ predictions as to what the Fed Funds Rate level will be at the end of the year for the next three years and then a longer-term view. The official rate forecast is set based on the median of all dots. Since its introduction, the Fed dot plot has become one of the most closely watched news releases among investors.


The most recent projections from the FOMC meeting dated 16 June now indicated two rate rises of 0.25% each before the end of 2023, while previously no rate rises were expected before 2024. But it is noticeable that the ‘dot plot’ has a very wide range of predicted outcomes for 2023, reflecting a great deal of uncertainty around the way both growth and inflation will play out in these unprecedented times. Why this chart is relevant The more hawkish tilt by the Fed in June signalled the beginnings of a monetary policy tightening cycle and triggered an immediate, but very short lived, alarm in markets. The subsequent comments from Fed governors, reaffirming their view that the inflation rise will be temporary, and the reality that the tightening will be very slow and gradual, with interest rates no more than 0.5% or thereabouts for at least the next 18 months, helped to push down yields on longer dated bonds and supported equity markets.


This will be a very long cycle, the Fed will not tighten policy pre-emptively, it and other central banks continue to err on the side of caution with respect to the state of the economic recovery, and policy is likely to remain supportive for a considerable time ahead.

Source: Bloomberg Finance L.P., Momentum Global Investment Management Research Date: August 2021

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