Despite Chair Yellen’s admonition, both pundits and journalists have been making much of the so-called “dots chart” released after the close of Wednesday’s FOMC meeting. The chart shows FOMC participants’ views of where interest rates are likely to stand at the end of each of the three forecast years (2014-2016) and over the intermediate term, and those commentators have argued that the data suggests an acceleration of the FOMC’s return to a more normal policy environment. We think this interpretation is a reach, and we will try to demonstrate why.
Most commentators have concentrated on the middle set of policy interest rates in the chart and the fact that they have moved up from the last set released in December. Indeed, in the December 2013 data, five people had the funds rate at over 1% by the end of 2015. The same was true this March. The key difference was that, in March, five people had the funds rate at 1% and six had it below 1%, whereas ten had it below 1% in December 2013, and only two had it at 1%.
But...
We must also remember that it matters which participants are likely to have had particular rate projections. First, it seems clear that the five governors in 2013 and four governors in 2014 (there are now three vacancies) plus President Dudley, who is vice chair of the FOMC, vote in lockstep. That group controls the deciding vote on policy, since there are only four other Federal Reserve Bank presidents who are FOMC voting members at any one time. Most likely, then, all the current governors and President Dudley are five of the group of six that has the policy rate below 1% by the end of 2015. Equally important, it isn’t conceivable that the new Obama appointees will break from that control group; and when the positions are filled, meaning that the seven governors and President Dudley will continue to control the vote.
Second, we also need to keep in mind that last year’s FOMC is not this year’s FOMC, and the composition of the FOMC in 2015 and 2016 will be radically different. This is because President Pianalto will be gone in June and three of the current bank presidents’ terms are technically up in February 2016, if not sooner (some special age rules may or may not come into play). So unless unusual circumstances prevail, Presidents Fisher, Lockhart, and Plosser will be succeeded by new presidents whose rate preferences are as yet unknown. Of the outgoing presidents, only President Lockhart will be a voting member in 2015, and he has always voted with the majority throughout his tenure. It is also likely that, along with President Lacker, at least two of these outgoing presidents are among the group whose 2015 and 2016 rate predications were far above 1%, given their outspoken concerns about the inflation potential in keeping interest rates too low for too long. So what we are facing is considerable uncertainty as to what views and likely rate predictions will be when the time comes, because six of the possible 19 FOMC participants are unknown.
It seems reasonable to assume that all of the governors and President Dudley are in the group that had rate predictions for 2015 at 0.75 or less, and we know from the dots for 2016 that the FOMC is not going to stop restoring rates to normal at 0.75%. However, from history we also know that coming out of recessions, the FOMC tends to move cautiously in 25-basis-point increments. This implies that the most likely time for a movement in the federal funds rate, in order to get it to 0.75% by the end of December 2015, would be to start at the next-to-last meeting of that year, which would put it in either the last week of October or the first week of November, depending upon the actual meeting schedule. Given the current projections, that is not a time frame and schedule that justifies attributing much weight to the definition of “considerable period of time” as meaning six months after the end of QE tapering. Worst case is that the first move would not come until the September meeting, a timeline that would get the policy rate to the 1% level contained in the projections data. That is a full two meetings after the end of the six-month period following the current projected end of tapering. Of course, policy is dependent now upon “incoming data,” but looking at the projections and past policy suggests that June or July is not consistent with current rate projections.
BY Bob Eisenbeis