bank rates

The Blue Dots, Revisited

rates increaseFed-watchers were hoping the Federal Open Market Committee would offer a new signal this week that it’s getting ready to raise a key interest rate.

The central bank disappointed.

Signaling instead that it is in no hurry, the committee opted to maintain its policy of holding rates near zero for a “considerable time.”

But there were subtle changes to the FOMC’s blue dots, the only measure of the Fed’s thinking on this issue you should pay attention to.

You see, the Fed uses the blue dots to explain the mindset of the (voting and nonvoting) members of the rate-setting committee.

A blue dot on the documents released following Fed meetings represents a vote of sorts from individual officials. They’re predicting, as it were, where the federal funds rate could be set at the end of a particular year.

The federal funds rate is the short-term, bank-to-bank lending charge the central bank sets. It influences all sorts of other yields, including on savings accounts and certificates of deposit.

For years, the committee has predicted its first rate increase in 2015. That prediction didn’t change this week.

Fed predicts a 2015 rate hike

But members did shift their projections slightly higher for where the rate will be set at the end of each year. That’s good news.

Each dot on the chart below shows where individual committee members, following the June Fed meeting, believed the rate was likely to be at the end of 2015, as well as what the expected long-run average should be.

Blue dots from the Federal Reserve

Half of the committee thought the rate would be set at 1% or lower at the end of next year. Half put the rate at slightly above 1% or higher.

Following this week’s meeting, however, more members are projecting an end-of-2015 rate greater than 1%.

The projected acceleration in subsequent years, however, appears to slow a bit. Ultimately, the committee has settled on a long-run rate just below 4%.

While the blue dot projections are not a guarantee when rates will increase, they sure do provide more information than the Fed’s official policy.

From The Wall Street Journal:

“The Fed is still looking for a critical mass of signals to start tightening, and the ‘considerable time’ phrase has been downgraded to mean nothing at all,” Steve Blitz, chief economist at ITG Investment Research Inc., said in a note to clients.

Consider the dots a guide to help you know when it might be safe to start shopping for deposit products again.

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