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MACRO VIEW COLUMNS: The Fed Just Said Get Ready for Volatility — in 2020

(Bloomberg) — Traders have become so accustomed to a dovish FOMC, even when it’s tightening policy, that they seem to have forgotten what a hawkish Fed actually looks like. Wednesday’s statement and summary of economic projections offered a reminder, with the crucial 2017 and 2018 dot plot medians remaining unchanged…projecting another 100 bps of rate hikes by the end of next year. Moreover, the economic projections showed little concern over any long-term implications of this year’s hurricanes and retained belief in the Phillips Curve, albeit in a slightly weakened form. Perhaps most intriguingly, the Fed offered a glimpse of the future in which policy is actually restrictive. Fear not, volatility worry-warts. — the Fed’s got your back in 2020.

  • While the FOMC statement acknowledged the short-term impact of the recent hurricanes, they drew on the historical evidence to look through the disruptions in assessing the medium-term trajectory of the economy
  • Crucially, the 2017 and 2018 dot plot medians didn’t budge, with most committee members holding the line at or above the prior median levels. That’s a sharp contrast to market pricing — though in line with most economists’ projections. While there has been some adjustment in market pricing as a result of this revelation, OIS and Fed funds futures are still being very conservative in calibrating the Fed’s cycle–largely as a function of the uncertainty surrounding the economy and committee going into next year
  • It is true that the long-run rate median was marked down, from 3% to 2.75%. This was in line with recent rhetoric, and in any case still far above the terminal pricing embedded in the OIS and eurodollar markets
  • What’s particularly notable, however, is that the freshly-minted 2020 dot plot median was 2.87%…above the Fed’s perception of the long-run neutral rate. In other words, the dot plot projects that policy will actually get restrictive in 2020!
  • Of course, it’s important not to read too much into such long-term projections. Many of the current participants will not be around to vote on policy in three years. Moreover, a lot can change between now and then, so this projection clearly isn’t etched in stone
  • But restrictive policy is the stuff of economic volatility — and by extension, market volatility. For the Fed to include such an outcome in their projections is clearly hawkish
  • That doesn’t mean that vol will necessarily rise today, of course. After all, policy is still accommodative. But it does serve as a nice reminder that as policy gradually and inexorably moves towards, and perhaps beyond, neutral, vol will eventually rise. So hang in there, volatility longs. Only three more years ’til it all goes horribly right!
  • NOTE: Cameron Crise is a macro strategist who writes for Bloomberg. The observations made are his own and are not intended as investment advice.

To contact the reporter on this story: Cameron Crise in New York at

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