INSIGHTS

On June 22, 2015

AAM Viewpoints - Fed Dot Plot Projections

Watching the NASDAQ composite reach a new high reminded me of 15 years ago when everyone was waiting for the semiconductor book-to-bill ratio to be released. It was one the most anticipated announcements before the tech bubble burst as investors and analysts looked for indications of the performance and outlook for individual companies and the technology sector. Now, the announcement catching our attention comes from the Fed and seems to be a chart filled with dots.

Last week all eyes were focused on the Federal Open Market Committee (FOMC) meeting and their “Dot Plot” data as investors brace for a potential rate hike later this year. The FOMC kept the Fed Funds rate unchanged at 0.00% - 0.25%. The committee outlined their view on recent mixed data noting that economic conditions were improving with growth expanding, energy prices stabilizing, jobs numbers still strong and a continued recovery in housing. This, however, was offset by soft capital expenditures and net exports, as well as inflation measures that continue to run below the Fed’s objective of 2%.

The FOMC maintained their Fed Funds forecast for year-end 2015 at 0.625%, implying most officials still see a rate hike in 2015 but the 2016 year-end estimates were pulled in from 1.875% to 1.625%. We haven’t seen a rate hike in almost 10 years and Federal Reserve policymakers appear to be ready for a change as 15 of the Fed’s 17 participants are expecting a rate hike this year (see chart below). Additionally, 10 of the 17 policymakers haven’t ruled out 2 hikes this year (up from 3 policymakers in March). The projections below show only two officials don’t see a rate hike this year while five officials want to move it up 0.25%, and five more are looking for a 0.50% move.

Source: Federal Reserve

In its statements, the Fed also publishes projections for the unemployment rate, inflation, and real gross domestic product (GDP).

• The 2015 projection for real GDP growth is now 1.8%-2.0%, down from 2.3%-2.7% in March.
• The projection for the unemployment rate by the fourth quarter of 2015 is now 5.2%-5.3%, up from 5.0%-5.2% in March
• The projection for the rise in core personal consumption expenditures (PCE) is 1.3%-1.4% which is unchanged from March.

The table below shows projections for 2016 and beyond, but any long term projections, as well as some officials, are likely to change so focus on the shorter projections while noting trends in long term data.

Source: Federal Reserve

All in all, there were no surprises with mixed data continuing to lead to no course changes by the Fed. Although we may see a rate hike this year, I suggest not focusing on when it will occur. You may recall earlier this year the expectation was for a June rate hike before the disastrous March Non-farm Payroll report. The Fed announcement last week was unremarkable and I would keep an eye on GDP revisions (first quarter 3^rd revision is scheduled 6/24/15) and the second quarter advanced release (7/30/15). As Fed Chairwoman Janet Yellen stated, “The economic conditions are currently anticipated to evolve in a manner that will warrant only a gradual increase in the target Fed Funds rate.” This suggests a very slow, methodical rate hike cycle even when we reach the point of liftoff and likely leaves us with highly accommodative policy and continued low rate environment for some time.

CRN:  2015-0622-4807R

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