NAFCU CFO Conference Coverage: Pay Attention To The Dot Plot

FT. LAUDERDALE, Fla.–Where are interest rates headed? Pay attention to the “Dot Plot.”


Karen Gilmore

The Dot Plot is a visual representation (using dots) that shows where members of the Federal Reserve think rates will hit a given level over the short, medium and longer run. It has accurately forecast in 2018 the direction of rates, according to Karen Gilmore, VP and regional executive with the Federal Reserve Bank of Atlanta, and following the September Federal Open Market Committee meeting, HAD indicated more rate increases are coming in 2019. But hold on a minute, said Gilmore in remarks to NAFCU’s CFO Conference here.

While Gilmore said the Dot Plot indicates the FOMC will raise rates at its meeting in two weeks, the case for 2019 is changing.

The Dot Plot shows “significant number” of policymakers thought they might have to raise interest rates several more times in 2019 because the “economy might be so hot they might have to do something to temper it,” said Gilmore. “That’s particularly interesting as that was their perspective as of the end of September. But fast forward, and since then there has been a lot more rumbling about maybe not. Our (Fed Bank of Miami) president has been rethinking how aggressive we have to be in 2019. So, this is the space to watch. There will be a new Dot Plot after December meeting. I would suggest that is where you want to look and to compare that to the September Dot Plot. There you can see any shift in sentiment.”

The Dot Plot is available on the Federal Reserve’s website.

Labor Force Participation

Separately, Gilmore reminded the Federal Reserve has two mandates, maximum employment and stable prices (inflation). With the market now in its 97th month of new job growth, Gilmore said she has been particularly fascinated by the Labor Force Participation Rate.

“A lot of people have dropped out of the labor force,” observed Gilmore. “The rate had been declining and has leveled off in recent years.”

Gilmore noted the bulk of the labor force is individuals age 25-54. That trend line has been improving in recent years, and now about 82% of people employed, she said, largely due to increases in the number of women in the labor force.

Where there has been a decline in prime age men. “The question is what is happening to some of the men,” said Gilford. “Some of the research is interesting.”

Driving down further into that data of labor force participation rate by age, younger workers are coming into the workforce at a later age, due in large part to remaining in school longer. In addition, “today, Baby Boomers are staying in the workforce longer than they did 20 years ago. Workers are not dropping out at the pace they have done historically, which is interesting. It’s possible more prime age workers are coming in, but it’s Baby Boomers that have helped that labor force participation rate.”

Gilmore said It’s not a positive forecast,  as the future labor force participation rate continues to show declines—although some of that will be offset by automation.  “The last of the Baby Boomers will turn 66 in 2030, so we are going to have more Baby Boomers just by virtue of age leaving the labor force.”

Thinking About Unemployment & What’s Ahead

Something a little more current in terms of policymaking that every policymaker is “very much aware of,” according to Gilmore, and that is the “undershooting” of the natural unemployment rate.

The natural rate of unemployment refers to people eligible to work and actively seeking work who do not have a job, a number traditionally between 4.5% and 5.5%. Currently, the U.S. is at 3.7%.

Historically, said Gilmore, when the current rate of unemployment has dropped below the natural rate of unemployment, that period has been followed by recessions and spikes in unemployment. Gilmore acknowledged there remains debate, even inside the Fed, on where the natural rate of unemployment truly lies, and stressed that the current employment numbers do not necessarily forecast any economic downturn. Instead, she said, the data simply must be considered by policymakers as they think about setting interest rates.

Gilmore said the lack of wage growth continues to “perplex” the Fed and policymakers. From her own discussions, she said many small businesses have been “very creative” in finding ways to reward employees without raising wages, but that many may also be running out of “tricks in the bag.”

Fed projections call for the tight labor market to continue, which could mean wage increases as a result, Gilmore told the NAFCU CFO Conference.

Other Notes of Interest

Other points made by Gilmore:

  • Businesses have not been investing in this recovery as they have in earlier recoveries. Why? Gilmore said businesses have “generally hired its way through this recovery, rather than making big capital investments.” One of the discussion inside the Federal Reserve for 2019 is whether businesses will start to make investments as a result of the federal corporate tax cuts, she said.
  • In terms of the tariffs either put in place by or proposed by the Trump Administration, Gilmore said policymakers are looking at the outcomes in terms of inflation due to price increases and how they work their way through the supply chain.
  • Yield curve has been flat, said Gilmore, in large part because investors have not been very demanding for higher rates. With global growth slowing and other market volatility, the yield curve will remain under pressure, she said.
  • What should CU CFOs be watching in 2019? According to Gilmore, the list includes the aforementioned Dot Plot; the inflation numbers (“I think 2019 is all about inflation, so if there is no movement and stays in range of 2%, then will be about whether that tight labor market is enough to have policymakers continuing to increase interest rates”); the outcome of trade policies, consumer behavior around housing and durable goods, geopolitical and other economic issues.


Section: Standard
Word Count: 1132
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Copyright Year: 2019
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