NEW YORK (TheStreet) -- When it comes to the Federal Reserve these days, it's smarter to listen to the words than to watch the "dots."
That's the unavoidable conclusion after Fed Chairwoman Janet Yellen's latest performance, which coupled dovish language about how fast rates may rise once the central bank begins to move with a series of economic projections from Open Market Committee members that point to much-faster increases.
The language has been a much better guide to the Fed's action than the individual rate forecasts by each Fed member -- shown as "dots" on a chart -- for a long time now.
And the lower-for-longer stance on rates that Fed leaders such as Yellen and Boston Federal Reserve Bank President Eric Rosengren have articulated has also been a much better match for the economic data, in the U.S. and elsewhere. So if you're trying to make investment decisions based on what the Fed may do, dump the dots and watch the words.
"In spite of the fact that there is some progress on (moving toward full employment), the committee wants to see some further progress before feeling that it will be appropriate to raise rates," Yellen said at her press conference on Wednesday.
To watch the dots, you'd conclude there's a good chance that the near-zero Fed funds rate could hit 1% by the end of this year, which Wednesday's decision to keep rates between 0 and 0.25% all but rules out. Most members forecast that the rate would hit 1.5% or more by the end of next year, which would require a sustained, consistent push to add a quarter of a point at every meeting beginning in September. And three of the 16 forecasters said it will be above 2.5%, even pushing 3%.
That would, at least, be very inconsistent with a central bank that stopped quantitative easing more slowly than markets predicted, one that took longer than expected to drop a pledge that it would be "patient" before raising rates, and which now has officially moved past earlier projections that it might raise rates in March or June.
Since the FOMC members' projections are actually less aggressive now than they were in March -- reflecting a drop in their average projection of 2015 growth in gross domestic product to a range between 1.8% and 2%, down from 2.3% to 2.7% in March -- it's logical to think the level of conviction behind the lower-for-longer school of thought is at least as strong as it was then.
That's where the weak early-2015 data play a role. First-quarter growth was probably about flat, Yellen said -- the final GDP numbers come in next week. Indicators for the second quarter began weak, but now are more mixed. Moody's Analytics says data reported so far point to 3.1% second-quarter growth, but manufacturing data have remained soft and the Fed (like everybody else) is aware that this has been a stop-start expansion since the recession ended in 2009.
When the Fed acts, that obviously will make a difference to bond investments such as 10-year Treasuries, though strategists such as S&P Capital IQ's Sam Stovall have argued that any negative impact on bonds will be offset by the impact on stocks, led by cyclicals including home builders D.R. Horton (DHI), while banks including Bank of America (BAC) and Wells Fargo (WFC) may get a boost and consumer stocks led by Amazon (AMZN) almost certainly will. Bonds are likely to make a small, brief move down, if any at all. But if this dovish Fed feels emboldened to raise rates aggressively, it will mean that the economy and profits are cooking.
Ultimately, the data will trump everything -- most of all, data on wages and inflation. Wages, because Yellen has made clear since she took office last year that she is committed to seeing a whole suite of labor-market indicators improve before rates rise much, and wage growth has proven the most difficult indicator to move.
Yellen referred to recent improvements in wage data as "tentative," indicating she wants to see more. Similarly, the Fed has consistently said it expects inflation to move toward in 2% target in the medium term -- but the core rate of personal-consumption expenditure inflation hasn't topped 2.25% for any full year since 1993.
There's not much risk the Fed will need its inflation-fighting mode any time for the next couple of years, at least.