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Why the Fed's Dot Plot Matters

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J.D. DURKIN: I do want to talk about a phrase we heard an awful lot, Martin. It is dot plot. And I got my hands on the analyst notes from Bank of America Securities today. And this jumped out to me. Here’s what BOFA securities writes. They say the surprise to us came in the dot plot where the median member expects another 125 basis points of hikes by year end and a terminal policy rate of 4.5% to 4.75, almost a third of the committee says BOFA sees a terminal target rate of 4.75 to 5% as appropriate. Talk to us here about the dot plot specifically. This is largely the sort of future guidance here, if you will, of individual members and their expectations. What did we learn there and why is the dot plot so important amidst all the other headlines that we had coming out of yesterday?

MARTIN BACCARDAX: Yeah the dot plot is effectively a way that we can put into visual practice the expectations for rate hikes from various members of the open markets committee, the people that actually ultimately vote on rate decisions for the Fed. Now, when you actually put those onto a graph, you can see the differences in projections and also kind of put together a bit of an average. Now, whilst the market was anticipating maybe a slightly lower terminal rate, somewhere just over 4%, they were probably surprised to the upside on that projection of 4.5%. But there’s such a long way to go between now and then. I’m not sure that anybody’s putting a great deal of money on that. Really what was more important was what you alluded to, and that was the fact that investors were a little bit surprised to see that the balance of probability for rate hikes between now and the end of the year is for 1 and 1/4 point, when prior, it had been about 1%. However, and this is a really important note, the voting on that or the projections, 10 members thought we would get to 1.25% between now and the end of the year, nine thought we’d only add another point between now and the end of the year. So whilst it’s a balance that’s higher, the balance is really, really narrow. It’s only two members that are differing and that’s why we’re seeing that difference in projections. So I’m not sure that was the most hawkish aspect of it, but it nonetheless indicates that all of the policymakers are having a slightly different opinion about where they’re headed in the longer term. In the shorter term, it’s just a little bit more balanced.

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