Dotty

INVESTORS obsess over the Federal Reserve’s “dot-plots”. These charts show the rough trajectory that senior Fed officials think its benchmark interest rate should follow over the next few years. Before every second meeting of the rate-setting Federal Open Market Committee (FOMC), members say how high they think the rate should be at the end of the current year and the two subsequent ones. Each estimate is then plotted as an anonymous dot on a chart, to provide a sense of the range of views within the FOMC. For instance, at its meeting in March, seven of the 17 members thought that the benchmark rate should be 0.625% by the end of the year (see chart). They will now be preparing new dots for their next meeting, on June 16th-17th.

At first glance, the dot-plots seem to offer a wealth of information. For instance, they show that there is plenty of disagreement within the FOMC. Its two most dovish members think the rate should remain where it is (a range of 0-0.25%) until the end of the year, whereas its fiercest hawk wants the rate to rise to 1.625%. For the end of 2016, the range is even wider: 0.375% to 3.75%.

But the...Continue reading