Fed Dots and Negative Interest Rates

September 28, 2015

Earlier this week I was reading an article on negative interest rates, and came across a really interesting graph (to me at least) that I hadn’t seen before:

 

This graph is a “dot plot” of what each of the voting members of the Federal Open Market Committee (FOMC) predicted interest rates will be over the next few years during their September meeting. Initially, the chart may look like an old-school video game or one of those Lite Brite toys from the 90s, but there’s actually some pretty interesting information to be gleaned from it.

 

The first thing that stands out to me is the spread, particularly for 2016 and 2017. In regards to 2016, the perspectives of different voting members on what the rate should be range from slightly negative all the way up to just under 3%: a 3% difference. The same can be said for 2017 where we see one member voting for a 1% interest rate on the low end all the way up to a vote for almost 4% on the high end. It would seem, based on these ranges that there is a decent amount of certainty within the Fed itself as to what the appropriate plan of action should be.

 

Secondly, it’s equally important to note that there’s a dot below zero for both this year and next year, meaning there’s at least one member who believes that short-term rates should not only not be raised, but should be negative. A negative interest rate essentially means that a depositor has to pay interest to keep their money at the bank (as opposed to the other way around). At first glance, that sounds preposterous. Why would anyone pay to keep their money at the bank? But keep in mind that rates have already crossed into the negative zone in parts of Europe where central banks are doing their best to reinvigorate their economies and keep deflation at bay.

 

While it is unlikely that rates in the U.S. will drop to zero, particularly after last weeks comments from the Fed, it is important to note the dispersion and the uncertainty it represents. As the market continues to fluctuate as more news comes out, we may have to brace for more volatility until a clearer path, either inflationary or deflationary, emerges. Until then, we’ll just have to sit tight and look for opportunities to buy into positions of value during the turmoil.

 

"Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents under their individual assessments of projected appropriate monetary policy, September 2015." Board of Governors of the Federal Reserve System. Sept. 27, 2015. http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20150917.pdf.

Ortel, Will. "Introducing the Unterest Rate." CFA Institute Finance Contributor. Sept. 22, 2015. http://cfainstitute.tumblr.com/post/129634823047/introducing-the-unterest-rate.

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