COMMENT-Fed dot plots should matter to traders

With the Federal Reserve expected to leave monetary policy unchanged at the December meeting, the greater focus will be on the accompanying statement and the staff economic projections, in particular the dot plots.

While the dot plots have been previously played down by Fed Chair Jerome Powell, in terms of their significance for where rates will eventually end up, they do guide markets towards the path of least resistance. They are thus an important messaging tool for the Fed, even more so now that markets are pricing in 122bps of policy easing 2024, relative to the Fed’s forecast of 50bps worth of cuts.

The September economic projections saw a 50bps increase in both the 2024 and 2025 median dot plots, ultimately exacerbating the tightening impulse in financial conditions. It can be argued that the subsequent market impact, in which the USD and treasury yields gain ground, was the equivalent of the Fed carrying out a rate hike.

For the Fed to match current market pricing, they would need to downgrade their 2024 dot plot by 100bps. From where the current Fed Funds rate lies would mark five rate cuts to be expected, which at present appears unlikely.

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