The Fed’s dot plot and the case for a 4th hike in the June policy statement

Editor’s note: A version of this post was originally published at my Patreon account on 13 Jun

I have another more macro post on the Fed I am developing for later today. But I wanted to run this one by you because I am seeing a lot of chatter about the Fed’s dot plot.

The March 2018 Dot Plot

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The dot plot is a part of the Fed’s summary of economic projections. And these projections indicate where each Fed official sees the economy heading. More importantly, as a part of that, the dot plot shows where each official thinks the appropriate policy level is, given those projections.

For example, here’s the March 2018 dot plot.

Fed dot plot March 2018

Source: Federal Reserve

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Now, what people are talking about is where those dots representing appropriate policy rates are going to be on the chart released later today. This March chart shows two dots – presumably James Bullard of St. Louis and Neel Kashkari of Minneapolis way down there, separated from the pack. One dot is way above the others in 2019 and 2020. Take those away and you have a broad consensus.

The consensus now shows three rate hikes for 2018. And that’s been the official communication from Fed officials, one hike already undertaken and two more to come in this year.

The June 2018 Dot Plot

But the talk is of the summary of economic projections forcing those dots higher. The economy is doing so well that the median dot on the dot plot could move to four rate hikes when the Fed releases the numbers later today. And then the question is when the Fed officially guides to that fourth hike.

I have said that the summary of economic projections would show confidence in a robust economy. So I expect the GDP numbers to go up and the unemployment numbers to go down.

Look at the part highlighted below.

Summary of economic projections March 2018

We have already reached that number. So clearly, that number has to change. And I think it’s this number’s changing that will move the dots up. Then the questions are how much does it move the dots and what do they communicate about that movement.

I am starting to believe there is a real possibility that we get guidance to a fourth hike today. My base case says no guidance to a fourth hike. But that case rests on a knife’s edge. As I have told you, the economic case for a fourth hike is now there.

I will have more after the Fed releases its statement.

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