The Hawkish Taste of the ‘Dots’

Have you ever noticed that childhood memories come about in all sorts of seemingly unconnected ways? Perhaps it’s just the way human memory functions, which is more like an association machine than a tape recorder. But when I see or hear words and/or concepts that evoke strong remembrances of things past, my mind is shuttled directly into a Proustian recollection.

I had one of those recollections today that was prompted by the Federal Reserve, and it was, of all things, about gumdrops.

You see, in my youth I liked a candy called “DOTS,” which during my research for this article I discovered was the No.1-selling gumdrop brand. As the Tootsie website states, DOTS are “a snacking staple for both moviegoers and candy enthusiasts everywhere… Tootsie produces more than 4 billion DOTS annually from its Chicago plant…”

Well, I haven’t eaten DOTS in a long time, but I have been digesting the “dots” for many years now, and today I was served up a hawkish-tasting and bitter dose of the dots courtesy of the Federal Open Market Committee (FOMC).

The term “dots” is Wall Street shorthand for the “dot plot,” and basically this is a chart that plots out where each Federal Reserve member thinks the federal funds rate will be at the end of a specific period. The graphic here from today’s FOMC data release shows where Fed members expect rates will be at the end of each of the next several years.

Here, the dots show that the medium projection for the federal funds rate at the end of this year to be at least by another 125 basis points to a range between 4.25% and 4.5%. So, after today’s announced 75-basis-point hike in the federal funds rate to between 3% and 3.5%, and considering the Fed has two more meetings this year (November and December), that means that there will likely be another 75-basis-point hike at the November FOMC meeting and a 50-basis-point hike at the December meeting.

Those numbers are why I say the Fed has served the markets a hawkish dish of dots, because before today’s FOMC meeting announcement, the market was only pricing in a 50-basis-point hike at the November meeting and a 25-basis-point hike at the December meeting.

Perhaps more importantly, the FOMC now has projected that the so-called “terminal rate,” or the level at which rate hikes would stop, at a range between 4.5% and 4.75%. Interestingly, after the June FOMC meeting, the median projection was for the terminal rate was around 3.75%.

The reason this terminal rate matters is because at this point, investors just want to know when rate hikes are going to stop. Over the past two weeks, the main reason stocks have declined is because the market priced in a higher terminal rate than was previously expected, from 3.875% – 4.125% to 4.25% – 4.50%. Today’s even higher terminal rate now increases the chances the Fed will engineer an economic “hard landing” rather than a “soft landing,” and that, in turn, has weighed on stocks.

As for the market reaction to today’s FOMC news, we initially saw stocks sell off right at the 2 p.m. ET announcement. Yet when Federal Reserve Chairman Jerome Powell took to the podium for his press conference, the markets mounted a rally that sent the major indices into positive territory.

So, now the equity market is at yet another inflection point, as the smart money continues to price in the highest cost of money in more than 14 years. Will that new pricing mean more bitter-tasting bearish trading ahead?

While no one can say for certain, today’s hawkish taste of the Fed dots certainly doesn’t offer us a very sweet box of bullish gumdrops.

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On Reading’s Advantage

“A person who won’t read has no advantage over one who can’t read.”

–Mark Twain

Reading is one of the superpowers that humans can learn. Yet if you don’t read, you might as well not even know how to read. The flip side of this shrewd observation by the always-wise Mark Twain is that the more you read, the more advantage you’re going to have. So, make it a point to read more, and to increase your advantage in this game we call life.

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

IMPORTANT ANNOUNCEMENT: We are having our first Eagle Virtual Trading Event on Thursday, Sept. 29.  If you haven’t signed up for this yet, there’s still time. Just click here now to sign up for free. Believe me, you won’t want to miss this LIVE online event — as we bring together all five of Eagle’s investment experts at the same time (plus one special guest speaker) to reveal our 6 Ways to Create 4th Quarter Fortunes. Reserve your seat now by clicking here.

In the name of the best within us,

Jim Woods