U.S. federal reserve central bank

Dot Plot: Fed Signals Rate Hikes In 2023

The biggest takeaway from the latest June FOMC meeting is the dot plot of a large number of Fed officials now indicated two hikes in 2023.  The market interpreted that as a moving forward of timeline for rate hikes with rising inflation expectation. 

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To be clear, nothing has really changed in the short term.  The Fed will continue to buy $120b worth of treasuries and mortgage-backed securities every month.  It has to first put a halt on that which it promised to give ample notice.  Fed funds will remain near zero until such time Fed disposes off all those assets from its books significantly enough which will take at least 10-15 months, maybe longer.  In short, there will be no lift-off in rates until end of 2022 at the earliest.  

In fact, Fed Chair Jerome Powell has re-iterated that one should not read too much into dot plot as that’s not even and does not represent a formal Fed policy statement.  Dot plot was first introduced by previous Fed Chair Ben Bernanke back in 2012 where the rate-setting or voting members of Fed governors get to indicate where they see the fed funds rate ending in each of the next three years and long term (a 0.25% increase means one rate hike).  This dot plot is published quarterly and seek to give insights to what goes on in the minds of the various Fed officials.  However, it is not official policy statement and the Fed is not bound by it.  The dot plots also change very frequently throughout the year.

Still, the dot plot is the most watched piece in the quarterly FOMC meeting as it does indicate very strongly the likelihood of what’s going to happen if incoming data over the next few quarters or years do not contradict in a big way with those estimates.

Going by the medium estimate of the dot plots, out of the 17 voting Fed officials 13 now expect to see fed funds rate at 0.50-0.75% level by 2023 – 5 see no change at zero, 2 preferring 1 hike in 2023, 2 preferring 2 hikes, and as many as 8 expecting even higher rates than 0.75%.   In essence, Fed officials now believe that the economic conditions for raising rates “will be met somewhat sooner than previously anticipated, ” Fed Chair said in his news conference.

Other noteworthy mention from the FOMC:

  • The committee raised inflation expectation by a full percentage point from the last projection in the March meeting – from 2.40% to 3.40%
  • It revised GDP growth up to from 6.5% to 7% for 2021
  • Unemployment remain unchanged at 4.5% by end of the year

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In this meeting, the Fed has toned down its strong dovish language in recognition of a vastly improving economic outlook with mass vaccination roll-out in the U.S.  Still, it maintained its stance that inflation pick-up will be transitory and is expected to abate by 2022.  It sees inflation still trending to its 2% goal over the long run (it’s going to 3.40% only in 2021 but will settle back down as demand and supply work themselves out later)

Implications For Interest Rates In Singapore

Our view remains that until we get to actual lift-off in fed funds rate (in 2023), any shift in SIBOR and SORA could be temporal and might not be sustained.  Hence, even with Fed’s change in dot plot, we do not see any substantial and sustainable increase in rates until 2023 at the earliest.  At the point of publishing his article, the 10-year treasury yields have dropped back to 1.52% after climbing up close to 1.60% earlier on news of Fed’s revised dot plot.  The market has in recent weeks embraced the message of Fed’s transitory inflation.

Fed actions determine the direction of interest rates in Singapore to a large extent (see correlation in interest rate cycle).   We will be watching this space very closely. Announcement of tapering on bond purchases turning into asset sale will be the starting point.

We do not see any substantial and sustainable increase in rates until 2023 at the earliest.

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