Almost without exception, the nearly half-decade (and it’s hard to believe it’s been that long) I’ve spent writing about markets for mass public consumption has been a psychologically rewarding experience. I thoroughly enjoy it. And that’s really saying something. Because I don’t thoroughly enjoy much.
One of the only things I don’t enjoy about it is the necessity of having a Twitter account. Contrary to what you might be inclined to believe, you don’t actually need to follow any individual people. I follow only a handful now after purging almost everyone earlier this year. But you really do have to follow news outlets and other “official”-type accounts because Twitter has become synonymous with “breaking news.”
Right up until my pledge to never tweet again other than links (a promise I fully intend to keep, by the way), I used to tune in to “Finance Twitter” on FOMC days. It was a masochistic ritual. I despised it, but I did it anyway knowing full well that every day-trader, “PM” and “former buy-sider” (and everyone claims to be a former buy-sider on Finance Twitter) would spend the afternoon tweeting memes, derisive jokes, hot takes and economics mixed with tasseography, usually in that order. Virtually none of it was useful, and I often found myself in a state of actual perturbation, necessitating a lengthy walk during which I’d remind myself: “These are strangers. It’s not personal. And even if it was, it’s just a Fed meeting. There’s no reason to be angry at people you’ll never meet.”
I no longer put myself through that, but I imagine last week’s post-FOMC social media cacophony was particularly tedious given that the June Fed required would-be Fed whisperers (so, everyone on FOMC days) to try their hand at actual analysis as opposed to, I don’t know, tweeting that ubiquitous, poorly-Photoshopped picture of Powell’s head on Superman’s body or, worse, a looped gif of him turning the crank on a manual money printer.
Ironically in that context, the change that received the most attention (the dot plot) was precisely what I would have been inclined to dismiss with a flippant meme — if I were into that kind of thing.
If you’ve subjected yourself to my voluminous June FOMC coverage over the past five days, you’re aware I think the dot plot is silly (unless you’re a STIR trader or a front-end strategist). And also that, even if you’re inclined to take it seriously, fretting over whether rates might be slightly above zero by the time your newborn celebrates his or her second birthday is an absurd waste of angst that could be better allocated to things worth worrying about.
Well, with all of that as the (hopefully entertaining) preamble, Deutsche Bank’s Aleksandar Kocic delivered a characteristically cogent assessment in his latest note. “It has been our view since its inception that the Fed dot plots have been systematically misinterpreted and their significance exaggerated,” Kocic said, adding that,
The plot represents a survey of 18 Fed members regarding their view where position of short rate across different horizons should be. At each time slice there are 18 points, and when one rotates the paper by 90 degrees counterclockwise, each time slice corresponds to a histogram. 18 points are not enough for any meaningful statistics to be useful. The histogram is not capable of generating a contours of any rates distribution. The meaning of either mean or median, or any other distributional moment, cannot be a useful summary of the plot and even less so should one attempt to interpret it as having anything to do with expected future rates – even if one had a large sample survey capable of generating a robust histogram, that would not in any way correspond to the pricing distribution.
There you go. If you don’t like my colloquial, passive aggressive attack on the dot plot, there’s a logical reason to question its utility, at least when it comes to being something worth obsessing over.
That said, Kocic does think the latest dot plot “is saying something noteworthy.” Most obvious, there’s a lack of consensus. “The fact that the median corresponds to two hikes carries little significance, but the fact that now a majority believe that rates should be higher, although not clear by how much, is important.”
“The fragmented consensus within the Fed reflects the declining confidence in their original narratives of transitory inflation,” Kocic went on to say, adding that “this dispersion is a sign that we are entering a period of high sensitivity to the incoming data which could work towards shaping of a new consensus and firming up the timing and size of rate hikes and, possibly, contours of the tightening cycle.”
Ultimately, Kocic’s conclusion about the potential ramifications of a truly aggressive Fed are similar to my own (and to Ray Dalio’s, apparently). “While the Fed might be able to convince the markets to accept several rate hikes, an aggressive hiking cycle, in case it is needed to battle the side effects of the unprecedented policy mix currently in place, would most likely be encountered by severe market rejection.”
Note he used the word “rejection,” not “reaction.” That suggests the market, not policymakers, will have the final say.
Well put. Thanks.
Here is what seems so strange. The Fed rejects calendar guidance. The FAIT is sort of a vague state based guidance, but so loose and ill-defined that its not really guidance at all. Yet, markets, at least initially were shocked by the DOTS, which is completely silly and yes, I agree that they are not helpful and should be thrown into the dust bin. But the last week does tell us something interesting–both the Fed inspired carnage and the following “crash up” —that the level of fragility in this mother of all carry trades is sky high.
I think the Fed would be fine with a much needed 10-20% market correction / tightening event given present valuations…seemingly small, normal, and healthy, but would feel so worse in our present conditions…the dot fixation then might dissipate some then, and they may even slide back a couple quarters…
…and sorry, but for kicks … “Get your hands off me you damn, dirty dots…!”