In the previous article of this series, we discussed the views of the FOMC (Federal Open Market Committee) on three major economic indicators of the US and their projections for these indicators outlined in the SEP (Summary of Economic Projections). Apart from economic indicator projections, the SEP also contains a graph popularly known as the dot-plot. This graph displays the projected path of the federal funds rate as expected by policymakers.
Of the 17 members who presented their projected about the target range of the federal funds rate by the end of calendar year, only one expected that the federal funds rate would stand above 2% by the end of 2017; even in the September dot-plot, only one member expected the rate to be in the 2.0-2.25% by the end of next year. At a rate of a 25 basis point hike per meeting, this translates to six rate hikes next year.
Two members expected the rate to be between 0.75-1.0%, which means that these two expect only one more rate hike in the coming year. Meanwhile, 10 of the voting members expected the rate to be in the 1.0-1.5% range, translating into two to three rate hikes by the end of 2017.
Rate hike projections for other periods
Except for one participant, all others expect the federal funds rate to be above 1.5% by the end of 2018. At the rate of 25 basis points, this translates into at least four rate hikes in the coming two years. Interestingly, that one member expected the rate to remain in the 0.75-1.0% range for not only 2018 but 2019 as well. This effectively means that this member expects only one rate hike over the coming three years.
On the other end of the spectrum, one member expected the rate to be in the 3.25-3.50% by the end of 2018 and in the 3.75-4.0% range by the end of 2019. These top ranges are about 25 basis points higher than the projections in the September SEP.
In the longer-run, seven members expect the federal funds rate to settle at 3.0%; in September, six members had expected the rate to be at this level in the longer-run.
In the next three articles, let’s look at the impact of this monetary policy stance of the US on emerging markets.