Connecting the (Interest Rate) Dots

Everyone is talking about the Fed’s dots.

Where are we going? To how dot plots can help you.

But before we get to the dots, just a little rate history…

The Fed Funds Rate

Until 2 pm yesterday, the bank-to-bank lending rate—the fed funds rate—was creating some hoopla. Then the Fed said, “No rate hike yet.”

Actually they said, “…the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.”

The Fed used the word “target” because they cannot force banks to charge the fed funds rate. Instead, by injecting more or less money into the economy, they try to incentivize banks to lower or raise their lending rates.

You can see below that the fed funds rate has been close to zero for a long time.

From: NY Federal Reserve

The Dots

If we want to predict what the Fed will do next, we can use their dot plot.

Dots plots are graphs from the FOMC (Federal Open Market Committee) that show what individual FOMC members believe. Each dot represents one person’s policy preference for the future.

You can see below that only one person wanted a rate hike in 2014. Otherwise, everyone agreed.

A 2014 Dot Plot

From: NY Federal Reserve

But opinions have changed. Whereas in 2014, six FOMC members supported 2015 rates at or beyond 1.5 percent, now no one wants this year’s fed funds rate to rise above 1 percent. And between June and September, more people seemed to like lower rates.

Our Bottom Line: Why the Fed Matters

From government bonds to auto loans to mortgages, every interest rate we pay relates to the Federal Reserve. And yet, all the Fed is really trying to do is minimize unemployment and inflation.

So, knowing those dots affect our own lives, maybe we can use them to decide whether it makes sense to borrow now or wait.