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These 2 'dots' reveal the craziest thing that happened at this week's Fed meeting (SPY, QQQ, DJI, IXIC, UST, TLT, USD)

Published by Business Insider on Sun, 20 Sep 2015

The Federal Reserve hastwo strange "dots."On Thursday, the Federal Open Markets Committee, which sets the Fed's monetary policy, announced its decision to leave the federal funds rate at 0%-0.25%, maintaining a seven-year era of interest rates near 0%.The FOMC also updated its "dot plot," which shows every member's view on where the Fedfunds rate should be at the end of the next few years and overthe longer run. Curiously, two of them were negative.As thechart above shows, oneFOMC memberthinksinterest rates should be negative atthe end of 2015 and 2016.The dots are anonymous. Butseveral several economists, including thoseat Goldman, Morgan Stanley, and Barclays, have speculatedthat they belong to Minneapolis Fed president Narayana Kocherlakota.There are two reasons why this may be true.First,Kocherlakota has been a vocal FOMC dove. As early as January, he said the Fed should not raise rates at all this year, and was frequently the only one who disagreed with the FOMC's policy decisions.Secondly,Kocherlakota is stepping down from his postat the end of this year, and these dots will serve ashis legacy. Said another way, he's making a point on his way out the door.Negative rates have beenused by the European Central Bank to try and stave offdeflation. When interest rates are negative, people pay banks to park money there, and so the idea is that this wouldencourage spending.In her press conference on Thursday, Fed chair Janet Yellen was quick to shut down the idea of negative US rates in her press conference Thursday.Yellensaid that unless the economic outlook unexpectedly changes,"it's not something we talked about today. I don't expect that we're going to be in a path of providing additional accommodation."So that's out of the way.But the dots were the most dovish part of a statement that was little changed and if anything more cautions than many economists expected. If we pretended for a bit that the Fed's outlook would weaken to a point where it seriouslyconsidersnegative rates, it would likely be because of one of two things.First, the Fed acknowledged that it is concerned about the global economy."The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced, but is monitoring developments abroad," Thursday'sstatement said.This is new language that adds extra uncertainty for markets, as if more was needed at this point. The Fed did not mention China, but its most recent beige bookits anecdotal review of the economyhad a spike inmentions of China.After China devalued its currency several times last month, concerns mounted about the ripple effect of its economic slowdown.Athome, the Fed is worried about the slow pace of inflation towards its 2% target. The FOMC lowered its median forecasts for personal consumption expenditures (PCE) inflation from 2015 through 2018.However, the Fed repeatedthat it thinks the thingsholding down inflationthe strong dollar and lower energy pricesaretransitory.In a client note Thursday, UBS' Drew Matus wrote, "Our view is that inflation (and inflationexpectations) will remain subdued next year, allowing the Fed to move more slowlythan has historically been the case." And so barring a collapse, the low rate of inflation willserve to slow the pace of rate hikes once that process gets underway.But for now, it's safe to ignore the two mysterious dots and treat themand the message they sendjust as they are: Outliers.SEE ALSO:GOLDMAN: It's not going to happen in OctoberSEE ALSO:28 charts that show how America changed since the Fed gave us 0% ratesJoin the conversation about this storyNOW WATCH: KRUGMAN: Wall Street Is Wrong, Janet Yellen Is Making Exactly The Right Move On Inflation
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