Hello, I'm RJ Gallo, Senior Portfolio Manager, Federated Hermes.
Is the Fed likely to accelerate its policy timetable?
The Fed's Statement of Economic Projections, better known as the dot plot, which was released at the mid-June meeting, appeared to be an acceleration of the timeline. It's important to know what the dot plot is. The dot plot is like a survey of the 18 FOMC members. It is not official committee communication. It is not directed or guided by the chair or the vice-chair. So everybody has free reign to say what they wish and what they think is the appropriate path of monetary policy in years to come. And the dot plot was a bit of a surprise. You had two expected interest rate increases in 2023 when previously, there was only one, and you had, I think it was seven FOMC participants suggest that the first rate increase off of the zero lower bound where we currently are will take place in 2022. So in a sense, it was an acceleration under the timeline. But remember, the dot plot is a survey. It's not a promise. It's not a projection. It's not official committee speak. That doesn't mean it doesn't matter.
In any forum in life, if you could ask a committee of individuals who run an organization what their separate opinions are about where the organization should go, wouldn't you want to hear the answer? That's what the dot plot is. It's their separate opinions about the direction of monetary policy, but it's not official communication. Chair Powell, who has to get reappointed between now and 2022 and 2023, he would argue we're not lifting off as soon as that dot plot suggested, and he tried to downplay it. The markets, on the other hand, are aware that Chair Powell may not be reappointed. We'll see. And the many other members of the FOMC will likely still be there, and we now have seen their survey responses, which suggest that interest rates are going to be rising a little bit more and a little earlier than some had anticipated. That said, having a Fed funds rate between 0.5 and 0.75, which is what would result from rate increases, two rate increases, is still pretty dovish policy. So we're not setting up for a surge in interest rates. It's just that it was a surprise versus expectations.
Disclosure: Views are as of June 22, 2021, and are subject to change based on market conditions and other factors. This should not be construed as a recommendation for any specific security or sector. Investments are subject to risks and fluctuate in value. Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices. Yield Curve is a graph showing the comparative yields of securities in a particular class according to maturity. Securities on the long end of the yield curve have longer maturities. Federated Investment Management Corp. 21-10101 (7/21)