Meet the pointillist Fed. It is five years since the Federal Reserve introduced its “dot plot”, a graphic showing where different members thought the Fed Funds rate would be at different points in the future. But for almost all of that history, markets have systematically refused to believe the dots. The dot plot has pointed to imminent rate rises and traders have placed all their bets on continuing cheap money.
Late last year, the election of Donald Trump finally succeeded in jolting growth expectations higher, and futures market expectations at last fell in line with the dots. Both entered 2017 signalling that three rate rises were likely for the year. Now that the market believes the dots, those dots have at last become a valuable weapon for the Fed’s monetary policy.
So it was that the Fed succeeded in cushioning Wednesday’s rate rise, almost exactly as it presumably desired, by the masterly inactive strategy of not changing its dots. As the year dawned, a rate rise as soon as this month was thought unlikely. And yet it has happened, and been greeted by cheerful buying of both stocks and bonds. That is largely because the dot plot remained unchanged. With this rate rise clearly signalled, and priced, more or less everything today depended on the future trajectory of rate rises. Now that traders take the dots seriously, the Fed had an easy way to signal that it was not accelerating from its prior intention of hiking three times this year.