Fed interest plans until after 2020 known

They refer to the feeling that committee members have about what the Fed should do with the official interest rate. In the graph, with the interest rate in percentage on the vertical axis and time on the horizontal axis, each member indicates with a dot where the interest rate should be in his/her opinion. This so-called 'dot plot' appears after every meeting with a press conference.

In the latest edition of this 'dot plot' (see the graph below) we see that 4 members believe that interest rates do not need to increase again this year, 11 members believe that interest rates should increase once more and 1 committee member would like to would like to see the interest rate increased twice. Next year, according to a large majority of the committee, the official interest rate in the United States should be slightly above 1%. 

Text continues below the chart.In the 'dot plot' we see that 4 members believe that interest rates do not need to increase anymore. Source: Fed

That is normally the part of the 'dot plot' that gets by far the most attention. In my opinion, the piece for the years 2019, 2020 and beyond tells us something very important. That is important for anyone looking further ahead.

Imaginary line
Look again at the dot plot above and try to connect the largest concentration of dots with an imaginary line. If you do that, you will see that the line slowly but surely creeps up. The median (the middle point if we sort everything from high to low) will be 2,1% next year, climbing to 2019% in 2,7, after which it will reach 2020% in 2,9. And something striking and telling happens there!

The median figure after 2020 is 2,8%, lower than in 2020. So what, you may be thinking, does that make a difference, 2,9% or 2,8%? Well, not in terms of level. But for me it's not about the level, but the direction.

What the Fed's interest rate committee implies is that the current operation of interest rate increases will last until 2020, that the pace at which interest rates will rise will be slower than that of a snail, and that the majority of the planned interest rate increases will take place in 2019 (in 2020 the interest rate would go from 2,7% to 2,9%, so 1 interest rate increase) and that that will be the end of the aforementioned operation. After that, the Fed will apparently start cutting interest rates again.

Fire doesn't go out
This is relevant for more than 1 reason. First of all, it would not be surprising if long-term interest rates in the United States come under significant upward pressure in 2018 and 2019. This usually means the same for long-term interest rates in the eurozone.

Secondly, an official interest rate of 2% to 3% is simply too low in the US, assuming 2% to 2,5% inflation and approximately 2% economic growth per year. To be able to speak of a somewhat neutral monetary policy, the Fed rate would really have to start with a 4 before the decimal point.

In other words, monetary policy remains much looser than before the crisis. In the past you have often read and heard that the European Central Bank (ECB) in fact has only one task: do not overtake the Fed.

Looking at the ECB
If the official interest rate in the United States remains significantly lower, there is a good chance that this will also apply to the ECB interest rate. And that means that when EURIBOR rates are likely to rise, it is very unlikely that they will reach pre-crisis levels. That is if EURIBOR rates increase significantly at all.

If we look at the sounds coming from Frankfurt, the ECB will not raise the official interest rate for the first time in years until the end of 2018 or even in 2019. If the Fed prepares for a new period of interest rate cuts at that time, the phase of interest rate increases by the ECB could be short-lived. These are all considerations that are very relevant for people who are about to take out or roll over a loan with a term of approximately 2 to 3 years.

Between now and spring 2018, the composition of the Fed interest rate committee change. All those new members may have very different views on the Fed's interest rate. That's right. They can have completely different views.

However, don't forget that hawks (central bankers who like to raise interest rates) are a critically endangered, if not nearly extinct, bird among central bankers. It's possible that the hawks will take over the Fed, but personally I wouldn't put my money on that.