One of my favorite movies of all time is Anchorman. In one of the scenes of that movie, the narrator says, “Bob Dylan once wrote, ‘The Times They Are A-Changin’.” Ron Burgundy had never heard that song, so when he fell, he fell hard.”
That scene comes to mind regularly these days when I think about where interest rates have gone this year, and where things may go in the future. In fact, there are so many unique dynamics at play at once right now. We’ll chew through them periodically through our “The Plane Truth” articles the rest of the year.
As you know, a new chair of the Federal Reserve took the helm in June. Kevin Warsh is now Fed chair, and in the role he’s prioritizing providing less forward guidance than in recent history. For our conversation, let’s look at the “dot plot”. What is the dot plot? Periodically, members of the Fed forecast where they think rates will be headed. All their projections are outlined on a single chart represented by dots …hence the name “dot plot”.
This practice was started in 2012 by then-Chair Ben Bernanke to help the market better understand where the Fed believed interest rates were headed, as we were starting to emerge from the doldrums of the 2008 economic crisis. The dot plot was one example of what became known as “forward guidance,” showing projections of where the economy may be and what the Fed will do given those projections.
Chair Warsh has been clear that he believes the Fed has focused too much on forward guidance (See here: What Dropping Forward Guidance Means For Financial Markets). And further proving this, he abstained from providing a forecast with the most recent dot plot. Exactly what impact this will have on interest rate markets over time remains undetermined and is worth watching.
This week the Fed meets for the Kansas City Fed Economy Policy Symposium in Jackson Hole, Wyoming. During the meeting, the market will be watching what Chair Warsh says (or doesn’t say) as it continues to figure out how much guidance the Fed will provide in the future.
And just like Ron Burgundy, if the market isn’t aware of Bob Dylan’s “The Times They Are A-Changin” it has the potential to fall hard.