With the release of the March FOMC minutes, many investors have been trying to decipher how and when the Fed may make their next move. What is confusing to many is that the Fed’s official statements on the economy and the direction of policy do not always seem consistent with the speeches and comments made by individual FOMC members. Some people are surprised to learn that within the Fed there are actually a wide range of views on where the economy is and what should be done to keep it growing. The Fed tends to put out guidance that represents the central views of the members, but it is by no means unanimous.
To get a better sense of this, let’s look at the “dots” from the recent meeting minutes. Along with the minutes, the Fed posts the level of the federal funds rate that each member thinks is appropriate at different points in time, wrapped up in a chart called “appropriate pace of policy firming”. This is where the dots come in. Each member’s view is represented by an individual dot, giving us 16 different opinions on where the federal funds rate should be at the end of 2014 and in the future. These individual dots paint a very interesting picture. It reveals that within the Fed there is a wide range of views on the current state of the economy and on the correct future path of Fed policy.
Below is the dot plot from the March minutes. Looking at 2014 we see that most of the indications are for 0-25 basis points (bps), consistent with current policy. But there is one indication of one percent. Sure, that’s only one out of the 16 participants, but it is still a big difference. That voter may believe that a) growth or inflation will spike up in the near term and the Fed needs to get ahead of that change, or b) the current low interest rate policy is not appropriate and short rates should be increased to more normal levels soon. I think that “b” is the more likely of the two, but either way that individual member is taking a much more aggressive stance than their 15 colleagues.
Now look at 2015, where the range is from zero to three percent. Two participants think that the federal funds rate should stay right where it is until the end of 2015. And one participant is calling for a rate that is three percent higher than it is today. That is a pretty significant spread. The more conservative members are essentially saying that the Fed will need to raise short term interest rates by 25 bps at each of the eight meetings in 2015.