You can forget the Fed statement – it’s all about the dots today. Yes, the word patient has been removed from the FOMC statement, but it is the construct in dots that really matters. While the statement ruled out an April increase, and its change of economic assessment from "solid" to "moderate," the tone of the dot plot strongly suggests the FOMC is coming around to a mid-year increase in the fed funds rate. The 17 dots representing members’ predictions on where short-term rates should be at the end of this year have been lowered substantially.
In the December report, views ranged between 1-2% with little by way of consensus. Only three members agreed on any given rate. Three months on, there is an emerging consensus with seven members predicting that rates will end 2015 between 0.5 and 0.75%. While there were only four voters calling for rates to end this year below 0.75% in December, now 10 members see that as the most likely occurrence. Only four see rates above 1% by year-end with the highest within a range of 1.5-1.75%.
Previously five voters argued that rates would end this year above 1.5%. The dovishness is also displayed across the forecast horizon, but I am somewhat disappointed by the lack of optimism about inflation and its impact on the so-called normal rate over the longer-run. The Seven members agree that short rates will top out at 3.5% in the long haul while six voters project normality will only be resumed after rates have risen to 3.75%. The softer tone has caused the dollar to slide across the board, which coupled with re-ignition of “lower for longer,” means a surge in equity prices.
Chart shows 2015 interest rate expectations slid in March.