During the financial crisis, the Federal Reserve slashed interest rates to help the economy claw its way back to growth.
With the economy now humming and the unemployment rate coming down, everyone now wants to know when the Fed might begin raising rates and how high rates will be in the next few years.
The Federal Open Market Committee (FOMC) — the people who set rates — periodically surveys its members for their forecasts for their benchmark Fed funds rate. The responses are published in the Fed’s famous “dot plot.”
Currently, some members see rates substantially higher in two years, while others don’t. These forecasts range from 0.5% basis points to 4.5%.
While that range appears wide, the dispersion of forecasts is actually much tighter than it was a year ago.
Deustche Bank economist Torsten Slok argues this is a sign of improving confidence at the Fed.
“One way to measure [confidence] is to look at the standard deviation around FOMC members’ forecasts of where they think the fed funds rate will be in two years time, ie look at the standard deviation of the dots in the Fed’s dot chart,” said Slok. “And the picture below shows that at their latest meeting the FOMC members felt more certain about the coming hike in the Fed funds rate than they did a year ago.”
To be clear, this is not a guarantee that rates will be higher in two years. For years, everyone’s been forecasting higher rates within a few years, and they have always been wrong.