The Strategist

Dot plot signals hawkish monetary policy

The Federal Reserve has paused its cycle of interest rate hikes. But there are no signs of an easing of monetary policy for the time being. This is evident from the rate projections of the US monetary authorities, summarised in the dot plot.

Thomas Wille
Reading time
10 minutes
Building of the Federal Reserve
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Last week's monetary policy meetings of the world's two leading central banks, the Federal Reserve (Fed) and the European Central Bank (ECB), produced no major surprises. After the expected interest rate hike of 25 basis points, ECB chair Christine Lagarde hinted at another hike of the same size in July. However, she was cautious about the September rate decision. Nevertheless, financial markets have already priced in further interest rate hikes of 0.25 percentage points each: investors expect a rate hike in July with a probability of 90%, and a further tightening in September with a probability of 65%. We share this view.

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As expected, the Fed has paused after several large rate hikes over the past five quarters. However, the Fed's communication remains hawkish - hinting at continued tight monetary policy - as Fed members' interest rate projections have been revised slightly upwards. The so-called dot plot now indicates a federal funds rate of 5.62% this year, which would imply two more rate hikes of 25 basis points each. But what is the dot plot and is it relevant at all?

Insight into the Fed's thinking 

The dot plot is a graphical representation of the individual interest rate projections of the 18 members of the Federal Open Market Committee (FOMC). It is usually published four times a year along with the FOMC's economic projections. Each dot on the chart represents an individual FOMC member's projection for the federal funds rate at various points in time, including the current year, the coming year, and over the longer term. The dot plot thus provides insight into the FOMC's thinking about the future path of monetary policy. It is important to note that the dot plot is not an official statement of monetary policy, nor does it specify a particular interest rate path.

The meaningfulness of the dot plot should always be taken with a grain of salt, as 18 months ago, in December 2021, it signalled an interest rate of 1.36%, compared to 5.62% today. FOMC members have only a limited view and are dependent on the evolution of economic data, as Fed Chairman Jerome Powell repeatedly points out. Nevertheless, the year-end projections provide some interesting information. As things stand, the Federal Open Market Committee is clearly signalling that, assuming the current pause ends, the next rate move will be up, not down.

High for longer

The Fed's communication confirms that interest rates will have to remain high for longer in order to bring stubbornly high core inflation down to the central bank's target of 2%. A market environment characterised by weak economic growth and heightened price pressures is not equally manageable for all companies. Stock selection will therefore be a key success factor for any portfolio in the months ahead.


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