Maths and the FOMC

The dot plot might include two downward pointing arrows to offset the two hawks dissenting from the Federal Reserve statement today, but there’s a growing group expecting a lot of rate hikes next year.

I’ve highlighted two clusters on the Fed’s “dots” showing where they expect rates to end next year and 2016:

Focus on that first group of four circled in 2015. They all expect rates to start rising next year, and to rise by 175bp by the end of the year. Assuming the Fed sticks to 25bp hikes – although it doesn’t have to, it hasn’t raised rates more than that in a single meeting since May of 2000 – that means raising rates seven times next year.

There are only eight meetings next year, so those four FOMC members are either expecting a hike of more than 25bp, or for the first rate rise to come at the March meeting. If rates rose more than 25bp in a meeting it is safe to say it would be treated as monetary shock and awe at the moment, so it is more likely those FOMC members expect to start raising rates in March.

The arch-hawk, presumably Plosser or Fisher, who wants 75bps of rate hikes this year and expects rates at almost 3 per cent at the end of 2015 seems to be planning for a rate rise at every meeting next year.

We do not know who the dots belong to, of course, or whether they are currently voting members. But with the markets completely hung up on the idea that the phrase “considerable time” in the FOMC statement amounts to a promise not to raise rates for six months – in other words, until April – it is worth considering that five out of the 17 participants appear to expect rates to go up by March.

Janet Yellen, Fed chair, had another go in her press conference today at trying to stop investors assuming that “considerable time” means six months, saying there is no “mechanical interpretation” of what it means – but if investors keep thinking it is six months, from the October end of QE, that means the first rate rise won’t come before April. The dots suggest there will be lots of pressure within the FOMC for a rise before that. Bond markets should wake up to the risk.

As an aside, three of them (assuming they are the same people) plus the arch-hawk expect hefty rate rises the next year, too. Rates would have to rise 25bp at every 2016 FOMC meeting to rise from just below 2 per cent to just below 4 per cent by the end of the year, as the three predict.