Get Ready: Everyone Is About To Be Talking About Dots

Dots candy

Get ready for The Dot Plot.

The FOMC is expected to announce its latest monetary policy decision at 2:00 this afternoon. Federal Reserve Chair Janet Yellen will also hold a press conference at 2:30 following the announcement, and the Fed will also release its latest Summary of Economic Projections.

People will be looking not just for a further tapering of the Fed’s monthly asset purchases — also known as Quantitative Easing — but also clues for where interest rates might be in the future.

For some of these clues, Fed watchers will turn to The Dot Plot.

The Dot Plot is a chart that shows where the FOMC’s 16 members think the Fed’s benchmark interest rate will be at the end of each year through 2016 and over the long term.

This is the most recent Dot Plot from the FOMC, released in March. The dots for 2014, for example, show that 15 of the FOMC’s members think interest rates will be unchanged at 0.25% at the end of the year.

March Dot Plot

Michael Hanson at Bank of America expects that Yellen will downplay the Dot Plot as not being a policy tool.

But the market will still be closely looking for any change in the Dot Plot.

In March, when Janet Yellen signaled that the Fed would raised rates six months after finishing QE, markets sold off hard. If the Fed stays the course in tapering QE by $US10 billion per FOMC meeting, it is scheduled to conclude the taper in October.

And last week, markets were spooked after Bank of England head Mark Carney said rate hikes could come sooner than expected.

It is unlikely the Fed would hike rates by more than 0.25% at any meeting and based on that assumption, the Dot Plot for 2015 still indicates that as of March, 9 FOMC members saw no more than 3 rate hikes in 2015.

The FOMC welcomes three new members for the June meeting, and the latest Dot Plot will contain 15 instead of 16 dots. Lael Brainard was confirmed on June 16, after the June 13 deadline for submitting projections.

Yellen may not see the Dot Plot as a policy tool, but Fed watchers hoping to read the tea leaves in the central bank’s latest announcement will be closely watching anything and everything the Fed says or releases today.

As a primer, here are a couple of Dot Plot scenarios that could roil markets.

The red dots on this modified chart show where the dots could lie if the plot strikes a dovish, or more conservative tone.

Dot Plot Dove

This red dots on this modified dot plot show where the dots could lie if the plot strikes a more hawkish, or aggressive tone with respect to where interest rates could go.

Dot Plot Hawk

The reality is that the Fed has been dovish since the financial crisis, and especially accommodative since announcing its latest QE program, which has now been in effect for more than 18 months now.

The Dot Plot probably won’t look much different than it did in March.

But just in case, we’ll be watching.