The Federal Reserve's Dot Plot, Explained | Bankrate

The Fed's dot plot is a chart that records each Fed official's projection for the central bank's key short-term interest rate. The dots reflect ... SkiptoMainContent Weareanindependent,advertising-supportedcomparisonservice.Ourgoalistohelpyoumakesmarterfinancialdecisionsbyprovidingyouwithinteractivetoolsandfinancialcalculators,publishingoriginalandobjectivecontent,byenablingyoutoconductresearchandcompareinformationforfree-sothatyoucanmakefinancialdecisionswithconfidence. Bankratehaspartnershipswithissuersincluding,butnotlimitedto,AmericanExpress,BankofAmerica,CapitalOne,Chase,CitiandDiscover. HowWeMakeMoney. 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WhentheFederalReserveannouncesitsnextinterest-ratedecision,you’llwanttoholdoffonconnectinganydots.That’sbecauseU.S.centralbankersattheirJunemeetingwillupdatetheir“SummaryofEconomicProjections”(SEP),aswellastheirheavilyscrutinized“dotplot”chart.ThisgraphicindicatestoconsumersjusthowmucheachFedofficialthinksitwillcosttoborrowmoneyinthefuture.It’sgoingtobenotablebecauseit’sthefirsttimeofficialswillbeupdatingtheirprojectionssinceMarch2022,andofficialsarelikelytotakeratesevenhigherthantheythoughttheywouldbackthen.Buteventhoughitseemscomparabletogettingasneakpeekatthewinninglotterynumbers,youshouldstillproceedwithcaution.Manyexperts—includingmembersoftheFeditself—havequestionedthepredictivepowerofthistool.Fedofficials’projectionsareneversetinstone,andtheycouldcontinuetoevolveasmoreinformationabouttheeconomy’srecoverycomesin.“Dotsaretobetakenwithabig,biggrainofsalt,”FederalReserveChairJeromePowellsaidataJune2021pressconference,aphrasehe’softenrepeated.“They’renotacommitteeforecast,they’renotaplan.Thedotsarenotagreatforecasteroffutureratemoves.Andthat’sbecauseit’ssohighlyuncertain.”Here’severythingyouneedtoknowaboutthedotplot,includingwhatitis,howtoreadit—andwhyyoumightwanttothinkcriticallyaboutit.WhatistheFed’sdotplot?TheFed’sdotplotisachartthatrecordseachFedofficial’sprojectionforthecentralbank’skeyshort-terminterestrate.ThedotsreflectwhateachU.S.centralbankerthinkswillbetheappropriatemidpointofthefedfundsrateattheendofeachcalendaryearthreeyearsintothefuture,shouldtheeconomyevolveastheyexpect.Officialsalsoprovideadotforthelongerrun,whichrepresentstheso-called“neutralrateofinterest,”orthepointwhereratesareneitherstimulatingnorrestrictingeconomicgrowth.EachdotrepresentsoneFedofficial—fromPowelltoboardmemberLaelBrainard,fromNewYorkFedPresidentJohnWilliamstoChicagoFedPresidentCharlesEvans.Ofcourse,it’sallkeptanonymous,andnooneknowswhichofficialiswhichdot.WhentheFedisfullystaffed,thedotplothas19individualprojections;however,onevacancyontheFed’sboardofgovernorsmeansthere’sonefewerdot.AnotherdotisalsomissingfromtheFed’slonger-runprojections:St.LouisFedPresidentJimBullard,whohasbeenvocalaboutwantingtoomithisprojections.OntheY-axisisthefedfundsrate,andontheX-axisistheyearforwhichofficialsgavetheirforecast. CourtesyoftheFederalReserveBoardofGovernors HowtoreadtheFed’sdotplotHereiswhytheFed’sdotplotishelpful:Itcanhelpyouspotwherethebiggestclustersare,whichinturnallowsyoutoinferwheretheFed’sbiasmaylie.Forexample,ifmultipleFedofficialsseeratesclimbingevenhigherthantheyalreadyare,youcouldinferthatthisisagenerallymorehawkishFed,eveniftheexactratepathisn’tsetinstone.AsofMarch,youcantellthatthebiggestclusterofFedofficials(five)sawtheU.S.centralbank’sbenchmarkinterestratehittingarangeof1.75-2percentin2022.Sevenmore,however,sawratesrisingevenhigherthanthatrange,whilefourmorewereexpectingratestobeslightlylessaggressive.Morebroadly,thatsuggeststhatFedofficialsarealmostuniformlybentontighterpolicy.Overthelonger-run,officialsexpectthefedfundsratetobe2.5percent.Thatratetypicallystaysthesame,butitcouldchangeovertimeasofficialsupdatetheirforecastsforinflation,unemploymentandgrowth.Itmaysounddaunting,butifyouhaveahigh-yieldsavingsaccountorarecarryingcreditcarddebt,thechartofferscluesaboutwhereratesmightbeayearortwofromnowfromtheofficialsinchargeofmakingthosedecisions.Butthereareobviouscaveats:ThefutureneverevolvesastheFedexpects.Caseinpoint:BytheendoftheJulymeeting,theFedcouldverywellraiseinterestratesabovethe1.75-2percenttargetrangethattheywereprojectingtoreachbytheendof2022.Officialsaremovingevenfasterthantheypreviouslyexpectedforonereason:Inflationhasn’tsloweddownliketheythoughtitwould.“Youhavetorememberwiththedotplotthatthisis,inmanyways,officials’basecasescenario—ifeverythingunfoldsthewaytheyexpect,”saysSarahHouse,directorandsenioreconomistatWellsFargo.“Morethananything,it’schangingveryrapidly.”WhythedotplotwascreatedFedofficialsstartedusingthedotplotin2012atatimewhentheeconomywasstillrecoveringfromtheGreatRecessionandwheninterestrateswerestillnearzero.ThecentralbankwantedtogiveFedwatchersanadvancelookatwhatofficialswerethinkingbeforetheymadeanyofficialpolicydecisions,recognizingthatFedcommunicationcanoftenbeaspowerfulatguidinginvestors’expectationsasratemovesitself.Itwasaformof“aggressiveforwardguidance,”aconceptthatformerChairmanBenBernankecreatedtopreparemarketsfortheFed’smovementawayfromtheunconventionalsupportmeasuresitintroducedtokeeptheeconomyafloat,accordingtoRyanSweet,directorofreal-timeeconomicsatMoody’sAnalytics,whoalsoheadsitsmonetarypolicyresearch.WhyyoumightnotwanttoplacetoomuchfocusonthedotplotTheultimatequestionishowhighrateswillrise.Consumerpricesoverthepast12monthshaveskyrocketed,soaringinMaytothehighestannuallevelsinceDecember1981.ThatspikepromptedadramaticshiftattheFed.Aftersignalingformorethanamonththatratehikeslargerthanhalfapercentagepointweren’tonthetable,PowellandCo.lookincreasinglylikelytonowputitbackonthetableasinflationremainshotterthanexpected.Officialsarebroadlyexpectedtoconsiderraisinginterestratesbythree-quartersofapercentagepointattheirJunegathering—thelargestratehikesince1994.Evenso,Powellhasstressedtimeandtimeagainthatofficialswanttobeflexiblewiththeirratehikepath,respondingtodataasitcomesin.Butbeinghighlyreactionarymeansforecastswilllikelychange,possiblymeaningeachdothasaquickexpirationdate.“Tobemoredatadependent,theFedneedsalotofflexibility,”Sweetsays.“Thedotplotisn’taforecast.It’snotacommitment.Interestrateprojectionschangeastheeconomychanges,asdevelopmentsinfinancialmarketschange.Thedotplotgetsdatedprettyquickly.”There’salsothechancethatitcanbemisinterpreted–orignored.WallStreetpanickedinDecember,aftertheFeddeliveredahawkishpost-meetingstatementthatcalledfor“further,gradualincreases”andpublishedadotplotthatmappedouttwomoreincreasesin2019.ThoughPowellemphasizedthattheFed’spolicydecisions“arenotonapresetcourseandwillchangeiftheincomingdatamateriallychangetheoutlook,”themeetingstillhelpedsendstockstotheirworstDecembersincetheGreatDepression.EvenFedofficialshavequestionedjusthowhelpfultheFed’sdotplotcanreallybe.“Afewparticipantsexpressedconcernsthatinthecurrentenvironmentofincreaseduncertainty,thepolicyrateprojectionspreparedaspartoftheSummaryofEconomicProjectionsdonotaccuratelyconveytheCommittee’spolicyoutlook,”recordsoftheFed’sJanuary2019meetingsaid.ThoughPowellhasoftensaidthechartleadstoconfusion,healsosaidinaMarch2019addressthatit“canbeaconstructiveelementofcomprehensivepolicycommunication”ifit’sproperlyunderstood.ThedotplotincreasestransparencyoverFedoperations,accordingtoJuliaCoronado,presidentandfounderofMacroPolicyPerspectives,whousedtoworkfortheFed’sboardofgovernors.“TheFedfeelslikeitreallydoesneedtoexplainandjustifywhyit’sdoingwhatit’sdoing.ThedotplotandtheSEPisoneelementofapolicyoftransparency,”Coronadosays.“Butthatdoesn’tmeanit’susefulforthepublicorformarkets.Itcanbeconfusing,anditcanbemisleading.”ThepublicalsohasachancetoseethefullrangeofviewsontheFederalOpenMarketCommittee(FOMC).Regionalpresidentswhodon’thaveavote,forexample,canstillinputtheirrateprojections.Butthatcanoftenmeanthere’smorenoisethansignalsincethere’snotellinghoweachleaderarrivedathisorherownforecast,andonly12membershaveavote.“Isthatreallyconveyingusefulinformation?That’sverydebatable,”saysJonathanWright,professorofeconomicsatJohnsHopkinsUniversity.“Somepeoplethinkitjustcreatesconfusionoramixedsignal.” Writtenby SarahFoster U.S.economyreporter ReadmoreFromSarah SarahFostercoverstheFederalReserve,theU.S.economyandeconomicpolicy.ShepreviouslyworkedforBloombergNews,theChicagoTribuneandtheChicagoDailyHerald. Editedby MaryWisniewski Bankingeditor Youmayalsolike Fedkeepsinterestratesunchanged,expectsnomovesin2020 Fedforecastsurvey:Topexpertspredictborrowingcostswillbeleftalone—fornow Fedcutsratesbyquarterpoint,splitonfurtherreductions