Once the Federal Reserve begins raising rates, it’s likely to raise interest rates at nearly every meeting of the Federal Open Market Committee for two years, according to the dot plot released by the Fed today.
The federal funds rate is now between 0% and 0.25% and is likely to remain there for a “considerable time,” the Fed said Wednesday. But by the end of 2017, the majority of the committee expects the fed funds rate to rise to around 3.75%.
The Fed usually raises rates in quarter-point moves. That means the end game of 3.75% is 13 rate hikes away.
The dot plot suggests that the Fed may raise rates four times in 2015, from 0.25% to 1.25%. It may raise rates five times in 2016, from 1.25% to 2.75%, and it may raise rates four times in 2017, from 2.75% to 3.75%.
The Fed meets eight times a year, so the dot plot suggests a rate hike at nearly every meeting from the middle of 2015 to the middle of 2017.
Of course, the dot plot isn’t supposed to be taken as gospel or a literal road map; it’s just what the members of the committee think is the mostly likely future as of now.
As Fed Chair Janet Yellen said over and over again in her press conference, there is a lot of uncertainty about the Fed’s forecasts, even over the next few quarters, never mind its forecasts for where interest rates will be at the end of 2017.
When the Fed began to raise rates in 2004, the Fed raised rates by a quarter point at 17 straight meetings, taking the fed funds from 1% in June 2004 to 5.25% in June 2006. In hindsight, some Fed officials believe the central bank was too predictable, regular and slow in raising rates, leading to a sense of complacency that may have helped fuel the credit bubble.
The Fed had the opposite problem in 1994, when it surprised the markets with a rate hike in February and kept raising rates all year, leading to what’s now known as the Bond Massacre of 1994. The fed funds rose from 3% at the start of the year to 5.5% at the end.