The Federal Reserve has two strange “dots.”
On Thursday, the Federal Open Markets Committee, which sets the Fed’s monetary policy, announced its decision to leave the federal funds rate at 0%-0.25%, maintaining a seven-year era of interest rates near 0%.
The FOMC also updated its “dot plot,” which shows every member’s view on where the Fed funds rate should be at the end of the next few years and over the longer run. Curiously, two of them were negative.
As the chart above shows, one FOMC member thinks interest rates should be negative at the end of 2015 and 2016.
The dots are anonymous. But several several economists, including those at Goldman, Morgan Stanley, and Barclays, have speculated that they belong to Minneapolis Fed president Narayana Kocherlakota.
There are two reasons why this may be true.
First, Kocherlakota has been a vocal FOMC dove. As early as January, he said the Fed should not raise rates at all this year, and was frequently the only one who disagreed with the FOMC’s policy decisions.
Secondly, Kocherlakota is stepping down from his post at the end of this year, and these dots will serve as his legacy. Said another way, he’s making a point on his way out the door.
Negative rates have been used by the European Central Bank to try and stave off deflation. When interest rates are negative, people pay banks to park money there, and so the idea is that this would encourage spending.
In her press conference on Thursday, Fed chair Janet Yellen was quick to shut down the idea of negative US rates in her press conference Thursday.
Yellen said that unless the economic outlook unexpectedly changes, “it’s not something we talked about today. I don’t expect that we’re going to be in a path of providing additional accommodation.”
So that’s out of the way.
But the dots were the most dovish part of a statement that was little changed and if anything more cautions than many economists expected.
If we pretended for a bit that the Fed’s outlook would weaken to a point where it seriously considers negative rates, it would likely be because of one of two things.
First, the Fed acknowledged that it is concerned about the global economy.
“The Committee continues to see the risks to the outlook for economic activity and the labour market as nearly balanced, but is monitoring developments abroad,” Thursday’s statement said.
This is new language that adds extra uncertainty for markets, as if more was needed at this point. The Fed did not mention China, but its most recent beige book — its anecdotal review of the economy — had a spike in mentions of China.
After China devalued its currency several times last month, concerns mounted about the ripple effect of its economic slowdown.
At home, the Fed is worried about the slow pace of inflation towards its 2% target. The FOMC lowered its median forecasts for personal consumption expenditures (PCE) inflation from 2015 through 2018.
However, the Fed repeated that it thinks the things holding down inflation — the strong dollar and lower energy prices — are transitory.
In a client note Thursday, UBS’ Drew Matus wrote, “Our view is that inflation (and inflation expectations) will remain subdued next year, allowing the Fed to move more slowly than has historically been the case.”
And so barring a collapse, the low rate of inflation will serve to slow the pace of rate hikes once that process gets underway.
But for now, it’s safe to ignore the two mysterious dots and treat them — and the message they send — just as they are: Outliers.