Eight times per year, 12 individuals gather in America’s stodgiest room to determine the single most important economic data point in the world. The individuals comprise the Federal Open Market Committee (FOMC) and the topic of discussion is the federal funds rate. Changes to the fed funds rate trigger changes in other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and ultimately, the scope of the global economy. It’s a big effing deal. Such a big deal, that it causes people to lose sight of why they’re investing. I’ll explain in a minute, but first, let’s play a game.
After each meeting, the FOMC releases a statement summarizing their decision. Below are snippets from the FOMC’s statements following their last two meetings. How many differences can you spot?
March’s statement:
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.
May’s statement:
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.
The two differences are so minor, I wouldn’t blame you if you missed them. In March, we were “moving into” better balance, but by May, we “have moved toward” better balance “over the last year.”
An insignificant edit, right? Wrong. Major stock indices impacting the investment of trillions of dollars swung 1.5% to 2% on this slight revision.
As silly as it seems, scouring FOMC statements is just one aspect of the larger interest rate guessing game. Algorithms and day traders obsess over every word of every statement, speech, or press conference, desperate to decipher what the FOMC might do next.
For traders looking to make a quick profit, playing the game might be a good idea. They might be able to profit on a midday swing. For long-term investors, the game is a dangerous distraction that can prevent them from reaching their goals.
Another part of the game is the “dot plot” exercise. The dot plot illustrates the Fed’s expectation of the fed funds rate at various times in the future. It would be a useful exercise if their crystal ball were any clearer than anyone else’s. Despite being the ones in charge, even they have no idea what they’ll do next.
In December 2021, the FOMC predicted a 0.9% fed funds rate by the end of 2022. Instead, they hiked rates 7 times to 4.3%, the highest in 15 years. The predictions for interest rates by the end of 2024 have ranged from 1.8% to 5.1%.
In a press conference in 2021, Chairman Powell admitted that “the dots are not a great forecaster of future rate moves. And that’s not because—it’s just because it’s so highly uncertain. There is no great forecaster of the future—so dots should be taken with a big, big grain of salt.”1
Despite the recommended portion of salt, the dot plot remains a major part of the interest rate guessing game.
The game has been played for decades, with varying degrees of ridiculousness. A bygone era even involved estimating the thickness of a briefcase.
The fed funds rate affects every aspect of our economy, making it crucial for your portfolio. But obsessing over semantics, dots, and briefcase thickness to guess at its future is like fixating on a tennis ball on an adjacent court while you’re playing pickleball. Instead, play your game—refocus your attention on building/sustaining long-term wealth and invest accordingly, so that you can endure the inevitable surprises in the world’s most important data point.
1I’d argue that challenging investors to spot minor tweaks in a written statement and publishing sure-to-be-wrong dot plot predictions subvert the economic seriousness of interest rates. The Fed undermines its credibility by indulging in silliness.
Disclaimer: Truepoint Wealth Counsel is a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A & Form CRS filed with the SEC, can be found at TruepointWealth.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice. Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products.