It is more apparent, however, in the change in expectations of appropriate policy tightening, as shown in the chart below. The bubble size denotes the number of participants forecasting a particularly level of the Fed Funds rate by the end of a particular year. The "long-run" defines some point at which the economy is near trend.
As we move through the year, inevitably expectations of tightening have been pushed out. This is not only for the few that were hawkish at the start of 2012, but for the majority of members shifting their views of 2014 and 2015 in just the last few months.
To be sure, there has also been a small shift in views on the long run, with some downward movement on the trend level of policy rates.
There was also a noticeable shift in the balance when two new members were added to the FOMC in June, with both these members on the dovish end of the scale. The composition of voting membership of the FOMC also changed significantly in 2012 and did see the consequences of this in a decidedly more active Fed in the second half of the year as we did in the first.
It was a mistake to underestimate how dovish the Fed was in 2012, although markets seem to have learnt their lessons of the last few years that even if growth is a little better, its going to take a lot to shift the Fed from their current stance. Indeed, they have now set an explicit bar for tightening in terms of an unemployment rate approaching 6.5%, which seems a long way off from here.
