What does the chart show?

The chart shows the Federal Reserve’s FOMC (Federal Open Market Committee) ‘dot plot’ – essentially each official’s expectations on where interest rates will be at future dates. Each dot represents an individual’s prediction as to what the federal funds rate will be at the end of each year until 2024 and then longer-term views. The median of all dots is then used as a basis to set the official rate forecast. Since its introduction, the Fed dot plot has become one of the most closely watched news releases among investors. The most recent projections from the FOMC meeting dated 15th December (so admittedly now a bit dated) indicated three rate rises before the end of 2022 and another three moves in 2023. Only two members were pointing to four rate rises this year. Looking at the median of the dots from December’s meeting against prior dot plots from September and June shows the shift to a more hawkish stance in response to inflation levels not seen in decades. It is noticeable that the dots show a wide range of predicted outcomes for the long-term, and even as soon as 2023, reflecting a great deal of uncertainty.

Why is this important?

A tightening labour market and inflation at multi-decade highs have pushed the Fed to adopt a more hawkish stance. Minutes from the December FOMC meeting showed officials voted to maintain the current target rate of 0% - 0.25%, but that members were on board with accelerating the tapering of the bond buying programme adopted at the onset of the pandemic. The pace of tapering will be increased from $15bn to $30bn per month beginning this month. This would result in the Fed ending its purchase program (quantitative easing) by March 2022 if there are no further changes, giving greater flexibility to raise interest rates. They have also now pointed towards quantitative tightening soon after commencing rate rises. Interestingly the market is now pricing in four rate rises through 2022, ahead of current Fed projections. You might often hear this referred to as the Fed being ‘behind the curve’. Importantly, with four rises now factored into market/government bond prices, if the Fed doesn’t see these through then positive capital returns could be made in government bonds. However, a faster and sharper move higher would almost certainly be negative.