I know the markets have been ignoring the Fed’s dots for some time now. But as I always say, as the meetings get nearer, the Fed dots get more accurate. For example, the day before a meeting, if you were to do this exercise and 12 of 16 members wanted a hike… they will be hiking. I wanted to point out some of the more interesting features from the dots.
- The Core summary. I typically like taking out the high 6 and low 2 dots – just to weed out the riff-raff and see what the center of the group is thinking. I suppose I could take out fewer hawks, to about 3, since Plosser, Richard Fisher and Lacker (all uber-hawks) aren’t there any more. Another reason to take out more hawks is because Yellen was leaning dovish last year, but she hasn’t been dovish this year. I’ll probably make a change once I know who the new FOMC members are.
- The longer run Core dot fell 22bps. This is a little larger than expected. I thought Kaplan had implied 2.625%, but his dot appears to be one of the four 2.5% dots. Overall, it looks like over half (eight of the fifteen) of the members submitting estimates chose to drop their dots by 25bps. This does not seem to correspond with the “low inflation is transitory” message they had been trying to peddle.
- No one dropped their hike dot to a skip this year. That is fairly shocking consider the low inflation prints and weaker retail sales we had been getting. They even admit that core inflation will stay at 1.5% this year, and they still want to hike! But I suppose the Fed does have a dual mandate, balancing growth and inflation (unlike other central banks who only have an inflation mandate). Payroll growth has been good. I just thought the Fed could be concerned about lower retail sales, increasing delinquencies, lower tax receipts, etc. But they seem to be focusing mostly on employment. Add that any “data noise” could be attributed to the hurricanes, and so the bar for a skip is high, despite the Fed budget/debt deadline being two days later.
- Kashkari thinks we get no hike next year… then 2 hikes in 2019 and 3 hikes in 2020. That’s some fancy-pants policy-setting right there. And this is why we remove the two bottom dots.
- Almost everyone thinks we get a rate overshoot in 2020. There are some dots that are 50+ bps higher in 2020 than in the long run. How can this be a coincidence? It is becoming clear that everyone is using the same model, and just tweaking it here or there. Lazy buggers! I feel like the Fed’s Skynet, I mean FRBUS, is spitting out the “growth and inflation are coming and we’ll need to catch up” story. I’m getting a deja-vu to all the other times where the Fed jacked up rates for no reason (like they did in March, and pretty much before every recession we’ve ever had). If you’ve have a track record as poor as the Fed’s, why would you be *that* dependent on the models? I thought the whole point of the Fed hiking earlier than the markets expect was to prevent an overshoot. I understand the theory of overshoots around a target – like pulled rubber band oscillating before reaching the target. I would just prefer the analogy of a pilot not having to go through the runway to land the plane. A lot of people think we could be in a recession in a couple of years. How are we still having a noticeable overshoot, and how can an overshoot be predictable this many years in advance, by so many people?
There’s no point in having 9 Supreme Court Justices, 12 jurors on a trial, 12 voting members of the FOMC, etc. if everyone is going to have groupthink. I’m almost certain FRBUS has no predictive power, and everyone may be copying it. It reminds me of a “friend” of mine (to protect his/her identity) who told me a football player once tried to cheat off of him/her on a high school math test. When they both got back their grades in the 70s, the athlete says, “Hey! You’re Asian. You’re supposed to be good at math!” Sometimes the guy/gal/model you are copying off of may not be that smart.
And on that politically incorrect commentary, I’ll call it a day.
 Reference to the Terminator movies where the machines took over.