💡Is The Fed About to Cry Uncle?

Issue 124

✌️ Welcome to the latest issue of The Informationist, the newsletter that makes you smarter in just a few minutes each week.

🙌 The Informationist takes one current event or complicated concept and simplifies it for you in bullet points and easy to understand text.

🫶 If this email was forwarded to you, then you have awesome friends, click below to join!

👉 And you can always check out the archives to read more of The Informationist.

---

Today’s Bullets:

• Fed Dots

• Fed Fund Futures

• Economic Red Flags

• Is This Time Different?

---

Inspirational Tweet:

If you listen to Fed officials, they all but declare they’re not quite ready to cut rates yet. And if they do, it’ll only be a single cut this year.

If you listen to Wall Street CEOs and investors, however, they say the Fed is pretty close to cutting rates and will act twice or more this year.

So, who is right?

And is Nick Timiraos right? (aka ‘NikiLeaks’ to institutional investors, nicknamed for his ‘inside info’ from the Fed) Will they cut not just twice, but three times this year?

And then what happens?

If this kind of Fed-speak has your head spinning with confusion, you’re not alone. But don’t worry. Because we are going to unpack all this and more today, nice and easy as always.

So, grab your favorite cup of coffee, and settle into a comfortable chair for a Sunday edition of The Informationist.

---

🟡 Fed Dots

How—oh how—can we know what the Fed is thinking?

Well, between the countless press conferences, public appearances, and off-the-cuff sound bites, we do get a bit of a mosaic of Fed opinion.

Especially since the bites not only contradict each other, but sometimes contradict themselves.

That said, we do get one single download of information, where all of the officials give their opinion on where they believe rates are going, both short and long-term.

The Fed Dot Plot.

Some background.

See, before the Great Financial Crisis of 2008, the Fed kept rate policy and predictions out of the public view. They only reported their actions after the fact.

This changed in 2012, when the Fed introduced what is known as the FOMC Dot Plot. This plot shows where each Fed official expects the Fed Funds Rate will be in the future.

The Dots are more of an opinion, though, rather than actual prediction or commitment.

God-forbid we get to hold any government official to their word, after all.

In any case, if you have never seen one, here’s what the latest Dot Plot looks like:

What we see here is the list of all of the current members of the FOMC on the left and a chart of their rate predictions on the right.

A couple of notes:

• The nineteen Dots are not votes, but rather the projections of where each of the members expects rates to be in the future,

• Only eight members have permanent votes, the remaining officials rotate for the last four votes, to total twelve votes at each meeting,

• The handy little key on the left shows the abbreviations: MH, H, N, D and MD (Most Hawkish, Hawkish, Neutral, Dovish, and Most Dovish); translated: Tighter, Neutral, Looser

The chart itself shows the estimated rate that each official thinks Fed Funds will be at the end of each year in the future, out to 2027.

If you want more of the history of the Dot Plots and what they mean, as well as a deeper dive into their usefulness, I wrote a whole newsletter about that recently that you can find here:

The Fed Dot Plot: Rate Trajectory or Reading Tea Leaves?

TL;DR: The Fed is terrible at predicting their own policy. Abysmal, really, as they are consistently wrong.

And as far as this latest plot, they are predicting (on average) that rates will be at 5.125% at year end.

Since current rates are 5.375%. this means that Fed officials expect one cut of 25bps (.25%) this year.

*Note: You may occasionally hear the current Fed Funds Rate quoted at 5.50%, but this is the Upper Bound of the Target Rate, with the Lower Bound at 5.25%, giving us the Median Target Rate of 5.375%.

So, if Fed officials themselves are estimating a single cut this year, and their statements still point to that, what is Nick talking about?

Why is the market predicting two, maybe three cuts? And how do we even know this?

Well, it all comes down to the Fed Fund Futures market.

That’s right, investors have found (read: created) a way to bet on the Fed Funds Rate in the future.

And they say Vegas is the ultimate casino.

---

🤑 Fed Fund Futures

If the Fed Dot Plot is a peek into the minds of Fed officials, then Fed Funds Futures is (an even better) insight into what the market is thinking.

And whether they think the Fed is actually full of 💩.

A little history.

Fed Funds futures began trading on the Chicago Board of Trade (CBOT) in 1988, partly in response to the 1987 stock market crash, known as Black Monday.

Fed Funds futures were created to provide investors a way to hedge against changes in the Fed Funds rate and help stabilize financial markets by providing liquidity in interest rate forecasting.

No surprise, Fed Funds futures became quite popular to hedge funds and institutional investors.

Here’s a look at what the current Fed Funds futures quotes are telling us: