16 Jun 2014
FOMC; connecting the dots - BAML
FXStreet (Guatemala) - Analysts at Bank of America Merrill Lynch explained, of all the attempts at greater transparency by the Fed in recent years, the dot plot of policy-rate projections is the most beguiling.
Key Quotes
"It is not a formal policy tool: voters and non-voters alike record a set of dots; they are submitted before the meeting; they are not subject to consensus agreement; and they reflect each participant's own interpretation of "appropriate policy.""
"This is why every Fed official, from hawk to dove, who spoke after the March FOMC meeting sought to downplay the dots. They each echoed Fed Chair Janet Yellen's press conference assessment: "The dots are going to move up and down over time a little bit this way or that… I really don't think it's appropriate to read very much into it.""
"The FOMC sees the dot plot as conveying a qualitative message: delayed liftoff, gradual hikes, lower long-term rate. The Chart of the Day shows that market pricing of the fed funds rate path is currently below the median dot - even below the median once the hawks are excluded - suggesting the market has taken on board the Fed's over-arching message of a patient and gradual exit. That said, as in March, there is once again the risk that the market may read a hawkish message into the dots - despite what is widely expected to be a status quo meeting with yet another small taper of US$10bn and unchanged forward guidance language."
"There are two main sources of uncertainty around the dots at the June FOMC meeting: new voters and new forecasts. The changes within each should largely be offsetting, but the dispersion of the dots could well increase."
"The risk would be for an upward drift in the near-term dots, which would likely produce a near-term selloff in rates and strengthening of the US dollar, in our view. That said, further downward drift in the longer-run dots also is possible."
Key Quotes
"It is not a formal policy tool: voters and non-voters alike record a set of dots; they are submitted before the meeting; they are not subject to consensus agreement; and they reflect each participant's own interpretation of "appropriate policy.""
"This is why every Fed official, from hawk to dove, who spoke after the March FOMC meeting sought to downplay the dots. They each echoed Fed Chair Janet Yellen's press conference assessment: "The dots are going to move up and down over time a little bit this way or that… I really don't think it's appropriate to read very much into it.""
"The FOMC sees the dot plot as conveying a qualitative message: delayed liftoff, gradual hikes, lower long-term rate. The Chart of the Day shows that market pricing of the fed funds rate path is currently below the median dot - even below the median once the hawks are excluded - suggesting the market has taken on board the Fed's over-arching message of a patient and gradual exit. That said, as in March, there is once again the risk that the market may read a hawkish message into the dots - despite what is widely expected to be a status quo meeting with yet another small taper of US$10bn and unchanged forward guidance language."
"There are two main sources of uncertainty around the dots at the June FOMC meeting: new voters and new forecasts. The changes within each should largely be offsetting, but the dispersion of the dots could well increase."
"The risk would be for an upward drift in the near-term dots, which would likely produce a near-term selloff in rates and strengthening of the US dollar, in our view. That said, further downward drift in the longer-run dots also is possible."