The Federal Reserve thinks otherwise. The dot plot continues to indicate four interest rate hikes next year.
Many times in the past, the Fed has been forced to bring its expectations in line with the markets’. Even in the current cycle, the bond market has consistently not been buying the central bank’s optimism – rightly so.
From this standpoint, it is only a matter of time before the Fed lowers its dot-plot projections.
Economic data continue to come in mixed. Inflation expectations are well-anchored. The recovery is into its seventh year.
Here is the rub.
The maturity of the cycle is precisely the reason why the Federal Reserve may be trying – or need – to build its arsenal. Right now, the Fed’s tool box is essentially empty. The sooner it fills its monetary quiver with arrows, the better equipped it will be to deal with the next downturn, which is not if but when.
In this scenario, a real tug of war lies between the Fed and market participants. The latter sooner or later may begin to throw a tantrum. And for a Fed that is sold into the efficacy of the wealth effect, that may be enough to revise the dot plot lower.
A tough spot to be in.
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