Fed Speak Hawkish; Data Remains the Policy Driver

As we reported last week, the market’s take on the most recent Fed meeting was decidedly dovish, particularly regarding the Dot Plot. In the ensuing week, several Fed committee members made far more hawkish statements in their public comments, and also criticized the Dot Plot. Philadelphia Fed President Patrick Harker said that in his view the committee should “get on with” hiking rates as soon as the April meeting. Chicago, San Francisco and Atlanta Fed presidents all noted that they support at least two more rate hikes this year, with one coming relatively soon. However, none of them are voting members this year. St. Louis Fed President James Bullard specifically criticized the Dot Plot, and said he has considered abstaining from it altogether. The issue is that the dots represent an educated guess at a moment in time and with only the data available at that time. They are not dynamic, while the data supporting the outlooks are exactly that. It must be pointed out that since the Dot Plot’s inception in 2012 the dots have been consistently overoptimistic with regard to the policy path. An internal subcommittee is currently assessing this method of communication to investors and how it can be improved. One proposal, from the January meeting minutes, was a fan chart to illustrate the uncertainty surrounding the Dot Plot predictions. It has been suggested by former Fed members and academics that instead of the dots (or in conjunction with them) the Fed use the press conference to describe how policy reactions would change under different scenarios as incoming data provides more information about the current state of the economy. That is to say, when it comes to policy action, what really matters is the fundamental data. As we noted in our comment on the Fed last week, we continue to monitor economic information as it becomes available in order to form our opinions about the expected policy path and its implications for portfolio positioning.

Sources: Bloomberg; Barron’s