The Fed’s Next Rate Steps: Connecting the Dots

Uncover whose dot is whose in the Federal Reserve’s dot plot, and the case for just two rate increases this year gets stronger

By Justin Lahart

Opinions differ on how many times the Federal Reserve will raise rates this year.

Opinions differ on how many times the Federal Reserve will raise rates this year. Photo: Bloomberg News
 

Look at Federal Reserve policy makers’ recent projections and it seems that the central bank thinks there is a decent chance it will raise rates three times before the year is out. Look at which policy makers are more hawkish on rates, and the odds diminish.

The “dot plot” of rate projections the Federal Open Market Committee released following its meeting last month showed participants divided on where they think rates should go. One projected the central bank should raise its target on rates by a quarter-point this year—just once. Nine projected two increases, three had three increases, and four had four increases.

In the three weeks since they met, FOMC participants have given a series of speeches, making it possible to figure out, more or less, whose 2016 dot is whose. Do that, and it appears that the bulk of policy makers with a vote on rates, and the Fed’s key decision makers, are at just two increases.

Federal Reserve Bank of Cleveland President Loretta Mester, who last week warned against delaying tightening for too long, is a good candidate for one of the four-increase dots. So, too, is Kansas City Fed President Esther George, who dissented at last month’s Fed meeting in favor of raising rates.


Richmond Fed President Jeffrey Lacker, who two weeks ago cited a pickup in prices as evidence inflation is moving toward the Fed’s inflation target, is likely another four-increase dot. It looks like a tossup over who is the final four-rise dot and who is a three-rise dot between St. Louis Fed President James Bullard and Philadelphia Fed President Patrick Harker.

The remaining three-rise dots probably go to San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart, both of whom have made hawkish-leaning statements in recent weeks. That puts Fed Chairwoman Janet Yellen, three of the four other Federal Reserve Board members, and the four remaining regional Fed presidents in the likely two-increase camp. Fed governor Lael Brainard, who has emerged as an influential voice for caution, is a good candidate for the one-increase dot.

So, of the 10 voters on the FOMC this year, it looks likely that seven project two or fewer rate increases. What’s more, those seven include the core trio of Ms. Yellen, Vice Chairman Stanley Fischer and New York Fed President William Dudley.

The Fed’s rate projections are just that—projections, not promises, that are dependent on what course the economy takes. But the projections also help shape market expectations of what the Fed will do.

As Evercore ISI policy analysts point out, the hawks, in their recent comments on policy, may also have been trying to do that, raising the possibility with investors that rate increases could come sooner than later.

The irony is that by showing their cards, they may also have revealed to investors the views of the
Fed’s more influential policy makers—and pushed the bar for more rate increases even higher.

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