Dots Will Shift Down; December Hike Could Still Be the Median But Only Barely

While the distribution of FOMC participants’ year-end fund’s rate projections will shift down, we expect that the 2017 median (and likely Yellen’s 2017 dot) will remain at three hikes this year.  

While the distribution of FOMC participants’ 2017 year-end funds rate projections will shift down, we continue to expect that the median 2017 dot will imply a third hike this year (in December).  • We note, from the outset, that we expect almost everyone is in a wait-and-see mode about a  December hike, awaiting incoming data on core inflation. Everyone seems to believe that it would be appropriate for the FOMC to remain on a gradual path to a neutral funds rate, with different nuances on “gradual” and different estimates of the neutral rate.  

• But, for now, they have to put their year-end 2017 dots somewhere. 

• At the June meeting, the dots were symmetrically distributed about the median; eight dots for three hikes in 2017, and four dots each for two hikes and four hikes respectively. (For our inferences on  who supplied which dot, see Naming the 2017 and 2018 Dots from the June Meeting.) 

• At the September meeting, we expect the distribution of dots for year-end 2017 will shift down.  Based on their inclinations and recent remarks, we expect three participants who projected three hikes in June will project only two hikes this time: Presidents Kaplan and Bostic and Governor Powell. (See  tables 1 and 2 on the next page.) Including Governor Brainard and Presidents Kashkari, Evans, and  Bullard–who we expect we’re all at two hikes in 2017 in June–that would leave seven hikes at two hikes. 

• We expect seven dots will be three hikes, including two of the four dots in June at four hikes we expect will move down to three hikes. 

• For the median to rule out a December hike, at least another dot must move down to two hikes.  

What about Chair Yellen? Well, she could get the deciding dot, even though we always emphasize the dots are individual decisions, each reflecting participants’ respective projections. But the Chair has a prerogative others don’t. 

• As Chair, Yellen will likely be the only participant who sees everyone else’s dot before she supplies her own. That gives her the opportunity, in a close call, to be the decider for the 2017 median dot! • Ordinarily, if it’s a close call, we put Yellen at the more dovish dot. 

• But she could choose to act strategically. If she had the opportunity to make the median two hikes or three (no to a December hike or yes to a December hike), what would she do?  

• A median 2017 dot that does imply no December hike would essentially price out a December hike.  Yellen might prefer not to see this. Market-implied expectations of a December hike are already below  50%.  

o If conditions thereafter subsequently warrant a December hike, then a no-December-hike median in September might make it quite difficult to move expectations of a December hike to substantially price in a December hike. 

o Nevertheless, coordinated remarks before the March 2017 rate hike got the job done. But that might be a challenge and constrain the Committee. 

• On the other hand, Yellen may see little downside in casting a deciding vote for a December-hike  median:  

o If ensuing conditions don’t show enough improvement for a December hike, then market expectations of a December hike were already pretty low, to begin with, and will have fallen further, so the Committee would not be constrained by market expectations if the decision is made not to hike. 

o On the other hand, if subsequent conditions improve to the degree that a December hike is warranted, then the FOMC has much less ground to make up to effectively telegraph a rate hike if the September median remains at three hikes. 

o We don’t know for sure that Yellen would think this way, but it’s certainly a possibility. • At the press conference, Yellen speaks on behalf of the Committee and always reports the median rate projections and any change in terms of the median dots, and often uses the median macro projections to explain any shift in the median dot. 

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