How Investors Should Connect the Fed’s ‘Dots’

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker, financial journalist, and money manager.
[Marriner S. Eccles Federal Reserve Board Building]

I hate the Fed and all it stands for.

I despise the very existence of a quasi-governmental cabal that controls the money supply, and I hate the fact that most people have no clue how the Fed got started and what its real purpose is (to facilitate big government, finance wars and control the financial system). Just read G. Edward Griffin’s brilliant book, “The Creature from Jekyll Island,” and I promise you’ll never look at the Fed the same way again.

Of course, I don’t expect the Fed to go away anytime soon, and despite the valiant efforts of Ron Paul and other freedom advocates to audit the Fed, I doubt whether the Fed is ever going to be scrutinized the way it needs to be in order to see what, precisely, it holds on its books.

That said, what we can do as investors is take advantage of the conditions in the market created in large part by the central bank’s manipulation of the money supply and interest rates. Think of this as a case of “beating them at their own game.”

On Wednesday, March 19, the Fed acted as expected by announcing a taper of its bond-buying program. The Fed reduced its asset purchases by $10 billion per month to $55 billion. The Fed also dropped its previous threshold of a 6.5% unemployment rate as a trigger to prompt an interest rate hike.

During her first-ever press conference, Fed Chair Janet Yellen suggested that interest rates would start to rise sometime around six months after the end of quantitative easing (QE). Wall Street was already betting that QE would end later this year, and while I think predicting the end of QE that soon is dubious, if the conventional wisdom turns out to be accurate then the first interest rate hike in many years would be around April or May 2015.

Exclusive  U.S. Dollar Hits Best Daily Gain in Five Months

The Yellen comments actually spooked traders, and the result was a sharp selloff in the stock market and the bond markets immediately after. And while this may have been a short-term overreaction to the Yellen hint on when rates would get turned up, all one has to do is effectively connect the “dots” to see the rising rate writing on the wall.

My friend and expert market watcher Tom Essaye, Editor of The 7:00’s Report, explained this concept of “dots” to me today like this:

“The projections of where individual members of the FOMC [Federal Open Market Committee] expect the Fed Funds rate to end each year is known as the ‘dots,’ and those ‘dots’ moved up decidedly in March compared to December. The latest FOMC release showed that 10 out of the 16 Fed officials believed the Fed Funds rate would be at or above 1% by the end of 2015. That compares with just seven back in December. That means the ‘dots’ are telling us that we will see at least one rate hike in 2015, and, logically, more than one.”

If this uptrend in the “dots” continues, it will effectively act as a long-term driver that will send market interest rates, i.e. yields on the 10-year Treasury note, much higher. And it is this bid that will keep bond prices trending lower (and bond yields higher) during the next year and well beyond.

For investors, this means either A) avoiding long-term Treasury bonds completely, or B) allocating at least some of your capital to an inverse Treasury bond fund such as the ProShares Short 20+ Year Treasury (TBF). This exchange-traded fund (ETF) is designed to deliver the inverse of the daily performance of the Barclays U.S. 20+ Year Treasury Bond Index, and that means it can make you money as the value of bonds fall and as interest rates (bond yields) rise.

Exclusive  Goldman Sachs Dodges $40 Billion-Bullet

So, if you want to get ahead of the trend and make some money, then start by connecting the “dots.”

Like This Article?
Now Get Jim's FREE Special Report:
The Top 11 Dividend ETFs to
Buy Right Now

Get up to 5X the yields of traditional income plays.

Get Access to the Report, 100% FREE

previous article

Questions or comments? What other investing topics would you like us to cover? Let us know in the box below... Click here for Video #1: Are You Making these 5 Fundamental Investing Mistake


Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Product Details


Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Product Details


Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker,
financial journalist, and money manager. As well as a book author and regular contributor to
numerous investment websites, Jim is the editor of:

Product Details


Bob Carlson

Bob Carlson provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details


Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street. Since 2010, Hilary's financial publications have provided stock analysis and investment advice to her subscribers:

Product Details


Used by financial advisors and individual investors all over the world, is the premier provider and one-stop shop for dividend information and research.

Product Details

Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.