After promising to raise rates, then delaying doing so repeatedly, the Federal Reserve has finally done it. This is the first time rates have been raised in a decade, and there are another three hikes planned for 2016, which will result in a funds rate of about 1.25 percent by next year’s end. Although we know that rates have finally been increased as well as the general plan for next year, many are wondering what the Fed intends to do in the longer term.
We can look at information from the most recent scattergram from the Fed to get an idea of what their plans are for the more distant future. The scattergrams are released every 90 days, and they use dots to show where each member of the Fed believes interest rates will be in the future. Based on the most recent release, it appears that following the three expected hikes in 2016, rates will increase to about 2.25 percent by the end of 2017. Rates should normalize at around three percent in 2018.
Although the scattergram can provide some information about the Fed’s intentions, it’s important to remember that what the body intends to do and what it does are not necessarily the same thing. Just 18 months ago, normalization was pegged at four percent. Further, these scattergrams are only as good as the data that they are based on. As a result of very bad forecasting related to inflation in the last few years, scattergrams have shown intentions that were far more aggressive than the actions that the Fed actually took.
