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Why has the Fed ‘dot plot’ rattled markets?

05 August 20223 mins read by Angel One
Why has the Fed ‘dot plot’ rattled markets?
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Back in February, economists at ING predicted that the US Federal Reserve’s June meeting would be pivotal. They speculated the assembly would stir a change in the US central bank’s tone regarding financial policies, which are in place since the beginning of the pandemic.

The Federal Reserve lived up to that hype. During this meeting on Wednesday, attending members hinted at least two subsequent interest rate hikes in 2023, a year earlier than the previous estimate.

The markets’ initial response was inclining towards the ‘sell’ button. However, as Fed’s message was broken down, markets seem to recoup a large share of their losses. Indeed, Wednesday’s meeting has many implications that could impact investors from Mumbai to New York.

Dot Plot – In brief

After Wednesday’s meeting, ‘Dot Plot’ is the new buzzword in town. It has managed to intrigue both monetary policy circles and investment markets alike. A dot plot is a tool for visualising data presented on a chart with the vertical and horizontal axis.

The US Federal Reserve’s Federal Open Market Committee members have to submit their predictions every quarter. Such predictions mostly focus on where proposed interest rates could be and prospective inflationary level. It also includes forecasts on economic growth.

Once all predictions compiled by the 18 members are submitted, the forecasts are plotted on a chart. A dot represents each member’s prediction. Typically, when multiple dots gather around a specific estimate, for instance, interest rate, the forecast is considered to be a consensus view.

Coming back to the latest’ dot plot’ launched by the members of FOMC. During the presentation, it was noted that the median view of FOMC committee members hinted at two separate interest rate hikes in 2023.

Dot plot and exit polls

Experts often think that one should take ‘dot plot’ with a grain of salt; some like the idea of comparing dot plot with India’s exit polls. Both tend to impact markets strongly for around two days but seldom have a strong correlation with actual results.

Indian investors need to pay attention to the shift in Fed’s timeline with regard to fee hikes. The Fed committee is nowhere close to discussing an actual rate of hike in interest rates.

The final word

A hiked interest rate in the US would indicate a strengthening fiscal system. Indeed, a strong recovery of the US economy will be beneficial for the global economy and markets. However, it may spell a poor run for INR, which dropped for eight consecutive sessions. And as this low-interest-rate environment persists, international markets will be speculative and volatile.

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