Channeling the Wiz of Oz, many Federal Reserve officials say we shouldn’t pay too much attention to the so-called dot-plot graph of predictions for the year-end federal funds rate by central bank officials.
 
But to harken back to an obfuscator of another era, John Mitchell, President Nixon’s attorney general, watch what they do, not what they say.
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Janet Yellen speaking after the Federal Open Market Committee meeting on Wednesday. Photo: Andrew Harrer/Bloomberg


To the surprise of nobody, the Federal Open Market Committee Wednesday gave no further indication in its directive on monetary policy when the initial liftoff in its key policy interest rate, the federal funds target, would take place. The comparison between the latest statement and the previous one in late April reveals little. The Fed’s key rate has been stuck in a range of 0-0.25% since the depths of the financial crisis in December 2008.
 
As Fed Chair Janet Yellen reiterated in her post-FOMC press conference Wednesday, liftoff should come sometime later this year. That is, if—and this is a big “if”—the policy-setting panel’s expectations for steady economic growth, improvement in the labor market, and convergence on the Fed’s 2% inflation target prove accurate. Policy, to use the tired term, is data dependent.
 
And that has been the conventional wisdom; that the initial quarter-point hike should take place either at the Sept. 16-17 FOMC meeting or the Dec. 15-16 confab. (While the FOMC also will get together on July 28-29 and Oct. 27-28, the September and December meetings will have updated economic projections and dot plots, plus a Yellen presser. The likelihood is the Fed won’t hike without the Fed Chair meeting the press to explain the move.)
 
But Yellen also noted in her presser Wednesday that, whether the FOMC moves in September, December or even next March, it doesn’t matter much. And as she repeats endlessly (mainly because the markets need to be reminded), the first Fed hike will depend on the data.
 
What’s vastly more important than when the Fed begins to lift rates is how much. And those dot-plot graphs implied the Fed will remain lower for longer than its previous graph indicated.
 
The Treasury market took due note. Yields on the crucial intermediate maturities—the so-called belly of the yield curve—fell sharply. The Treasury five-year note’s yield plunged 11 basis points, to 1.62% by late Wednesday afternoon from 1.73% just before the 2 PM EDT release of the FOMC’s statement and dot plots. To bond geeks, that’s a big move.
 
The dollar also backed off with the DXY —as the U.S. Dollar Index is familiarly known by its ticker—down 0.67% over that same time span. The currency market, along with the Treasury market, discerned the key message that the Fed will remain lower for longer than its oratory has implied.
 
Yellen also gave lip service to international considerations, acknowledging that a Greece default could roil global markets and thus wash up on U.S. shores, which is another reason for the Fed to be circumspect about hiking rates. And she took due notice of International Monetary Fund chief Christine Lagarde’s call to hold off on rate hikes this year without promising anything.
 
As for Yellen’s contention that the first rate hike will take place this year, the financial futures market agrees—but just barely. The January 2015 fed-funds future contract is priced nearly at a 0.38% target, which would be the mid-point of a range of 0.25%-0.5% and 25 basis points above the current target.
 
As Yellen noted in her presser, the dot plots indicated a downshift of about 25 basis points of what they illustrated previously in March. You can get the visuals for the June meeting here and the March meeting here. What you’ll observe is a tightening of the range of the dot plots toward lower levels.
 
Specifically, the mean estimate for end-2015 dropped to 0.5661% from 0.7721% in March, which is closer to the fed funds futures market forecast. For end-2016, the mean projection is down to 1.75% from 2.103% previously.
 
As for the futures market, it projects a 1.145% rate for the January 2017 fed-funds contract, close enough to the mid-point of a 1%-1.25% range for government work, but more than a half-point lower than the FOMC solons’ estimates.
 
The bottom line is the market is saying short-term interest rates will remain low for a long time. There may be a small increase by December, which is unlikely to have any meaningful impact. And in 2016, there could be three quarter-point hikes—which would lift the fed funds rate target to near its nadir of 1% after the rate cuts in the wake of dot-com collapse at the turn of the century.
 
The message of the markets continues to be interest rates will stay lower for longer than leading Fed watchers say. And longer than bullish stock market strategists expect as well. The Fed’s dot plot, moreover, is moving in the direction of the futures market.
 
So, watch what they do more than what they say. For when all is said and done, the Fed is likely to do a lot less than they say.