note the dot-chart !

hello,

Today I want to focus on a very important aspect when making investment decisions in the long term. Dot-chart, is a tool introduced by BB and is intended to serve greater transparency in the policy of the Fed and the fact it is the role perfectly. However, often the problem lies in the fact that a large number of observers do not want to see this chart.

Each member of the FOMC, marked by dots, at what level would see the main interest rate at the end of the next three years, and the so-called long (unspecified) period. All decisions are made assuming that the economy is balanced. Chart is published on a quarterly basis, after the meetings, after which we get to know a new economic projections and followed by a conference Yellen.

This chart is very important, it says (almost) everything, especially that Yellen gives the impression that he wants to represent not his views, and was a consensus within the Committee. Shows what is the attitude of all members and not just Ms. Yellen.

What should pay attention to?

chart 1. Target federal funds rate at year end published in June 2014

In June, the consensus assumed rate at 1 or 1.25% at the end of 2015, which meant 3 or 4 increases. The market did not yet priced in such a scenario, but Now it is - which brought just a clear strengthening of the dollar. Therefore, to dollar appreciated further, dots should more clearly focus on the level of 1.25%.

Consensus for 2016 years is less clear, but let's assume that on average it is 2.5%, ie the next 5 to 6 increases.

Indeed, short-term market rates in the United States are rising in anticipation of the first rise, making the dollar gains. However, at the same time, long-term interest falling. Even at the beginning of the year, freshly Open Market Committee decision to launch QE3 limit, yield on 10-year-olds exceeded 3%. In the spring it was 2.7%, and when the S&P500 came out above the 2000 pts., Less than 2.4%. It is a change that investors in the stock market very gladly accept: the lower long-term interest rates, the more future earnings are worth today. And yet the share price is nothing more than the discounted stream of future profits.

For comparison chart placed below the latest projections of the FOMC members from September this year. Compared to the previous graph we see all that strong tightening of monetary policy in the near future.

 

chart 2. Target federal funds rate at year end published in September 2014

regards,

oscarjp