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The FOMC’s Dot Plot Shows More Expectations of a Lower Rate

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Unemployment rate

In the previous article in this series we introduced the SEP (summary of economic projections) and highlighted the Fed’s expectations for changes in real economic output. Let’s take a look at the expectations for the unemployment rate.

Unlike economic growth, policymakers were bullish about the unemployment rate. Both the range and central tendency were down compared to December 2014 projections. As per new central tendency estimates, the longer-run unemployment rate reduced to 5.0–5.2% instead of the 5.2–5.5% projected in December. This means that policymakers expect unemployment to fall further, which will give them more confidence about the labor market.

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PCE inflation

Expectations for a rise in PCE (personal consumption expenditures) inflation took the most severe hit among all three indicators. While the expected range of PCE inflation for 2015 reduced from 1.0–2.2% in December to 0.6–1.5% in March, the central tendency expects inflation to be between 0.6% and 0.8% compared to 1.0–1.6% in December. Inflation is expected to rise to near 2% in 2016 (as per central tendency) and settle in a tight range near that level in 2017.

The dot plot

Along with the SEP, the FOMC (Federal Open Market Committee) also releases a chart indicating the appropriate target level for the federal funds rate at the end of a calendar year. The chart is known as the dot plot.

The dot plot released at the March 2015 meeting indicates that, although a rate hike in 2015 remains in the cards, more policymakers are expecting a lower federal funds rate than in December. While nine out of 17 participants were expecting the rate to be above 1% in 2015 in the December meeting, the number has come down to four. Seven participants expect the rate to be in the 0.50–0.75% range by the end of 2015.

Similarly, for 2016, 13 out of 17 participants had expected the rate to be above 2%. Only six participants still expect that number as per the latest plot.

This indicates that, although the rate may still rise in mid-2015, the pace of its rise will be slower than before. Looks like the possibility of lower consumer spending (XLY)(XLP)—which may affect stocks of companies like PepsiCo (PEP), McDonald’s (MCD), and Philip Morris International (PM)—and depressed inflation had its effect on policymakers regarding the speed of rate hikes.

In the last article of this series, let’s look at the financial markets’ reaction to FOMC’s March 2015 statement.

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