Mester and Richmond Fed President Jeffrey Lacker say investors trying to interpret “gradual” should consult the so- called dot-plot portion of the quarterly report, which graphs policy makers’ projections for the fed funds rate.
The Fed’s benchmark is currently in a range of zero to 0.25 percent, where it’s been since December 2008. September’s median forecasts imply four quarter-point increases next year, pushing the rate toward 1.5 percent, and another five in 2017.
Individual Predictions
Roberto Perli, a former Fed economist now at Cornerstone Macro LLC in Washington, is skeptical of the dots. He says the median or mean of 17 individual predictions isn’t a good guide to how Yellen will forge a consensus from a divided committee.
“The dots don’t care about compromise, they’re probably not the best predictor of what will actually happen,” he said. Perli thinks reality will be more gradual than the dots: he predicts three hikes a year following liftoff.
Richard Clarida, global strategic adviser at Pacific Investment Management Co., dislikes the dots for a different reason.
They’re fine, he said, if the underlying economic projections -- on unemployment, inflation and growth -- that drive the rate forecasts prove accurate. But if they’re not -- and they’ve consistently been wrong in the past -- investors are left guessing again.
“What we don’t know is what will be the rate path if the economy doesn’t look like the SEPs,” Clarida said. Because Fed officials haven’t done a good job of explaining their decision- making methodology, their response to alternative scenarios can’t be predicted, he said.
Fear not, says James Bullard, president of the St. Louis Fed. The fog will start to clear, and investor angst will ebb, when the Fed makes its second rate increase of the new cycle, he told reporters Nov. 12.
Until that time, whenever it is, he said, “we will not have credibility on the issue of how gradual is ‘gradual’.”