The Federal Open Market Committee (FOMC) is a twelve-member committee consisting of members of the Federal Reserve Board and regional Reserve Bank presidents. The FOMC has eight regularly scheduled meetings throughout the year to discuss and assess economic and financial conditions, monetary policy, and risks to long-run goals such as price stability, unemployment, and sustainable economic growth.
While the committee meets eight times a year, only one meeting each quarter involves a Summary of Economic Projections. One element of these quarterly summaries that garners a lot of attention is the dot plot which is a visual representation of where each member of the FOMC thinks the Federal funds rate should be at the end of each of the next three years as well as into the future. While the dot plot is not an official tool of the FOMC, it does provide some insights as to what various members of the FOMC are thinking.
Below is the most recent dot plot from the March 2019 FOMC meeting:
Each dot represents where an individual member of the FOMC thinks the Federal funds rate should be at the end of the year given the current economic information. As seen above, the latest dot plot now reflects that the majority of the FOMC members believe that the Federal funds rate should not be raised or lowered in 2019. In addition, the dot plot indicates that the FOMC believes that one more increase in the Federal funds rate in 2020 or 2021 will potentially complete the current tightening cycle that began in December of 2015.
Further examination of the dot plot provides additional insight into the thought process of the FOMC. The chart below shows the past two dot plot assessments along with the respective Fed Funds Futures contracts. The Fed Funds Futures contracts (shown in red) represent how the market is pricing the Federal funds rate in the future. Noticeably, both the FOMC and market have significantly lowered the expectations of the Federal funds rate. The market has fully priced in a 25-basis point cut to the Fed funds rate by the March 2020 meeting with additional decreases in the following months. The FOMC is still leaning toward an additional increase, however, it is currently in a “wait and see” mode until additional economic data, especially inflation data, provides enough information for either an increase or decrease in the Fed funds rate.
The dot plot can be an insightful and useful tool when examining the Fed funds rate and future projections. With recent changes in the FOMC language, Michigan CLASS does not expect any changes to the Federal funds rate in 2019. Interest rates have increased from the record lows experienced for almost a decade and presently offer the Michigan CLASS Participants the potential for additional interest income for the time being.