Kevin Warsh plans to withhold his "dot" from the Federal Reserve's quarterly chart of made-up interest rate predictions. The dot plot. That's what they call it. Sixteen unelected economists guess where rates might go, the Fed publishes their guesses as dots on a graph, and traders lose money based on the spacing between the dots.
Warsh's dot will be missing. He's Fed Chair now, apparently, and he's decided his specific guess about rates eighteen months from now adds no value to a chart full of other people's guesses about rates eighteen months from now. Revolutionary thinking.
The dot plot exists because the central bank determined that markets needed more forward guidance. Markets responded by creating derivatives based on the derivative dots of derivative forward guidance. Some guy in Connecticut right now is hedging his dot-based position with a strangle on the median dot while his wife texts her pilates instructor.
Withholding the dot is somehow news. The Chair of the Federal Reserve will still set monetary policy. He will still vote on rate changes. He will still give speeches that move markets. But his anonymous dot—the one that gets averaged with fifteen other dots into a median dot that changes every quarter—that dot stays home.
Retail traders are refreshing their brokerage apps wondering which dot was Warsh's dot. They're comparing this quarter's dot plot to last quarter's dot plot. They're counting dots. They're calculating dot dispersion. They bought calls based on dots.
The Fed will release the dot plot without Warsh's dot, markets will move, and some compliance officer at a regional bank will spend four hours explaining to his board why their duration positioning assumed Warsh's dot would be higher. He will use the phrase "tail risk" twice. He will not keep his job.
Withholding a dot from a chart of fake predictions is the most honest thing a Fed Chair has done in years, which tells you everything about the previous Fed Chairs.
Photo by Markus Spiske on Unsplash
Leave a Comment