Macro: The Bottom Line (9/22/14)

Beware of the blue dots

 

In last week's posting ("The ECB and the Fed: the transatlantic tug-of-war"), we discussed how the Fed and ECB were headed in opposite directions, and that markets may enter a period of uncertainty as the two central banks jostle with one another. In terms of dominating headlines, the Fed definitely scored a point in this tug-of-war tournament last week.

 

From the start of the week, markets were anxiously awaiting the results of Tuesday-Wednesday's FOMC meeting. Specifically, they wanted to see whether the Fed would keep its longstanding pledge to keep rates low for a "considerable time." Any qualification to this pledge would have been interpreted as a sign of an imminent rate hike. 

In the event, the FOMC did preserve the "considerable time" phrase word-for-word. But even so, all was not well in the markets, for the Fed still gave markets a rude awakening elsewhere: in its "blue dots." These refer to the interest rate projections of the FOMC's individual members, which are published quarterly in the form of scatterplots. [In case you haven't figured it out yet, the individual members' rate forecasts for the coming three years are shown as blue dots]. 

Back in the money-printing days when a rate hike appeared to be light years away, few paid much attention to these forecasts. But now, with the Fed on the cusp of ending asset purchases and likely less than a year away from raising rates, the dots have assumed paramount importance. And on Wednesday, they showed that FOMC members expect the fed funds rate to be 1.375 pct by the end of 2015. Three months ago, the median projection for end of year 2015 was 1.125 pct. Taking the consensus view that the first Fed hike happens in June 2015, this means that there would be at least 1 full percentage point worth of rate increases within a space of six months. 

In short, even while professing low rates for a "considerable time," the FOMC has in fact turned meaningfully more hawkish. This is surprising, given the dovish credentials of most voting FOMC members, whether it be Chair Yellen, Vice Chair Fischer, or NY Fed President Dudley. But as they say on the Street, never bet against the Fed. 

Draghi, now it's your turn ...