Dot Plots

Dot Plots

June 17, 2021

The Federal Reserve Open Market Committee (FOMC), the voting members of the Federal Reserve, met over the last two days and made their normal statement and Chairman Powell held the usual press conference. Nothing changed. Nothing moved. No rate hikes. No reduction in the bond buying they have been doing since things in this world went pandemic. But the dot plot chart moved. And the markets reacted. Badly. So, what is a dot plot?

 

 

 

 

The dot plot is what I call a tea leaf chart. In this case it projects out the personal predictions of each of the voting members on the committee regarding where they think the fed funds rate will be moving over the next few years.

 

So, although the Fed changed nothing, the committee members are showing a reaction to recent inflation or CPI numbers by moving up their prediction on when the fed funds rate will rise. In March, the last dot plot showed 4 members thought the first rate hike would come in 2022, and now 7 members do. And for 2023, 7 members had envisioned the first rate hike to come with 13 now believing so. Remember, rate hikes are designed to slow the economy and, as a result, inflation down to “acceptable” levels. Except they almost always lead to unacceptable recessions.

 

And although Chairman Powell talked about how completely unreliable their own predictions are and that this fed is totally focused on labor numbers, which are improving but still lagging by a few million jobs, and that the predictions always get changed based on what actually happens in the economy, the markets moved negative after the statement. And the Fed continues to tell us, despite the dot plot, that the focus will be on getting back to full employment and that the inflation numbers we are seeing now are most likely transitory; not a long term thing. Of course, only time will tell.

 

What we can see in the actual inflation numbers from last week are that certain sectors are running extremely hot. In fact, according to numbers from the Bureau of Labor, only five sectors account for a full 71% of the increase in CPI – and those are all directly related to pandemic reopening: energy commodities, used cars, dining out, car rental, and airline fares. Imagine where those sectors were a year ago.

 

Short-term market movements are almost always based on noise in the signal. A long-term investment plan follows the signal. The dot plot is something that is short-term based by nature. It’s interesting to follow and could be an indication of what’s to come in the following quarters, but still falls into the category of tea leaves when we look out farther in the future. 

 

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

 

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.