Are You Ready For The Fed’s Dots? FOMC Dot Preview

On Wednesday there is an FOMC meeting where the Fed will issue its quarterly Summary of Economic Projections (SEP).  The last SEP was the March 18th FOMC meeting, and interest rates fell on that day as the Fed downgraded the forward growth assessment and also lowered the estimates of year end Fed Fund targets.  Specifically, in March, the GDP estimate for 2015 went down to 2.3 – 2.7 (it had been estimated in December at 2.6 – 3.0).  The projections of the end of year Fed Fund target are represented by the “dot plot”, for the end of 2015, 2016 and 2017.  The average 17 dots were as follow:

So to round off, the 2015 year end estimate for FF target is 75 bps and for 2016 it’s 200 bps.  The market is pricing less tightening than that.  EDZ15 (December Eurodollar contract) is currently 99.370 or just 63 bps, which would be more consistent with a FF target of just 3/8% or 37.5 bps.  EDZ16 is 98.50 or 150 bps, which would equate to FF target of 1.125%.  Additionally, the EDZ15/EDZ16 calendar spread settled 88.5 on Monday, much lower than the 125 implied by the average Fed dots. 

What’s likely to happen Wednesday?  Well, for one thing, the guidance of recent Fed speeches has consistently been that rate hikes are likely to be gradual.  Therefore, I would expect the Fed dots to ease down a bit lower, coming somewhat closer to actual market pricing. 

The settlement prices on March 18 were: EDZ15 98.31, EDZ16 98.52 and EDZ17 98.00.  As of Tuesday morning, EDZ15 is 98.37, EDZ16 is 98.50 and EDZ17 is 97.85.  So really, the market hasn’t significantly changed its opinion of what the Fed is likely to do.  And I would expect the dots to align a bit more closely with the market.  So, while there has been much hand-wringing about possible dislocations associated with the onset of Fed hikes, for now the short end of the interest rate complex seems quite comfortable in terms of pricing.  While longer term bonds and stocks may react negatively to a variety of external factors, they are NOT likely to be jarred by the Fed, even though some analysts may use the Fed as an excuse.