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The Federal Reserve’s dot plot explained – and what it says about interest rates

Jerome H. Powell
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When the Federal Reserve announces its next interest-rate decision, you’ll want to hold off on connecting any dots.

That’s because U.S. central bankers at their June meeting will update their “Summary of Economic Projections” (SEP), as well as their heavily scrutinized “dot plot” chart. This graphic indicates to consumers just how much each Fed official thinks it will cost to borrow money in the future. It’s going to be notable because it’s the first time officials will be updating their projections since March 2022, and officials are likely to take rates even higher than they thought they would back then.

But even though it seems comparable to getting a sneak peek at the winning lottery numbers, you should still proceed with caution. Many experts — including members of the Fed itself — have questioned the predictive power of this tool. Fed officials’ projections are never set in stone, and they could continue to evolve as more information about the economy’s recovery comes in.

“Dots are to be taken with a big, big grain of salt,” Federal Reserve Chair Jerome Powell said at a June 2021 press conference, a phrase he’s often repeated. “They’re not a committee forecast, they’re not a plan. The dots are not a great forecaster of future rate moves. And that’s because it’s so highly uncertain.”

Here’s everything you need to know about the dot plot, including what it is, how to read it — and why you might want to think critically about it.

What is the Fed’s dot plot?

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 what each U.S. central banker thinks will be the appropriate midpoint of the fed funds rate at the end of each calendar year three years into the future, should the economy evolve as they expect. Officials also provide a dot for the longer run, which represents the so-called “neutral rate of interest,” or the point where rates are neither stimulating nor restricting economic growth.

Each dot represents one Fed official — from Powell to board member Lael Brainard, from New York Fed President John Williams to Chicago Fed President Charles Evans. Of course, it’s all kept anonymous, and no one knows which official is which dot.

When the Fed is fully staffed, the dot plot has 19 individual projections; however, one vacancy on the Fed’s board of governors means there’s one fewer dot. Another dot is also missing from the Fed’s longer-run projections: St. Louis Fed President Jim Bullard, who has been vocal about wanting to omit his projections.

On the Y-axis is the fed funds rate, and on the X-axis is the year for which officials gave their forecast.

Fed's March 2022 Dot Plot

Courtesy of the Federal Reserve Board of Governors

How to read the Fed’s dot plot

Here is why the Fed’s dot plot is helpful: It can help you spot where the biggest clusters are, which in turn allows you to infer where the Fed’s bias may lie. For example, if multiple Fed officials see rates climbing even higher than they already are, you could infer that this is a generally more hawkish Fed, even if the exact rate path isn’t set in stone.

As of March, you can tell that the biggest cluster of Fed officials (five) saw the U.S. central bank’s benchmark interest rate hitting a range of 1.75-2 percent in 2022. Seven more, however, saw rates rising even higher than that range, while four more were expecting rates to be slightly less aggressive. More broadly, that suggests that Fed officials are almost uniformly bent on tighter policy.

Over the longer-run, officials expect the fed funds rate to be 2.5 percent. That rate typically stays the same, but it could change over time as officials update their forecasts for inflation, unemployment and growth.

It may sound daunting, but if you have a high-yield savings account or are carrying credit card debt, the chart offers clues about where rates might be a year or two from now from the officials in charge of making those decisions.

But there are obvious caveats: The future never evolves as the Fed expects. Case in point: By the end of the July meeting, the Fed could very well raise interest rates above the 1.75-2 percent target range that they were projecting to reach by the end of 2022. Officials are moving even faster than they previously expected for one reason: Inflation hasn’t slowed down like they thought it would.

“You have to remember with the dot plot that this is, in many ways, officials’ base case scenario — if everything unfolds the way they expect,” says Sarah House, director and senior economist at Wells Fargo. “More than anything, it’s changing very rapidly.”

Why the dot plot was created

Fed officials started using the dot plot in 2012 at a time when the economy was still recovering from the Great Recession and when interest rates were still near zero. The central bank wanted to give Fed watchers an advance look at what officials were thinking before they made any official policy decisions, recognizing that Fed communication can often be as powerful at guiding investors’ expectations as rate moves itself.

It was a form of “aggressive forward guidance,” a concept that former Chairman Ben Bernanke created to prepare markets for the Fed’s movement away from the unconventional support measures it introduced to keep the economy afloat, according to Ryan Sweet, director of real-time economics at Moody’s Analytics, who also heads its monetary policy research.

Why you might not want to place too much focus on the dot plot

The ultimate question is how high rates will rise. Consumer prices over the past 12 months have skyrocketed, soaring in May to the highest annual level since December 1981.

That spike prompted a dramatic shift at the Fed. After signaling for more than a month that rate hikes larger than half a percentage point weren’t on the table, Powell and Co. look increasingly likely to now put it back on the table as inflation remains hotter than expected. Officials are broadly expected to consider raising interest rates by three-quarters of a percentage point at their June gathering — the largest rate hike since 1994.

Even so, Powell has stressed time and time again that officials want to be flexible with their rate hike path, responding to data as it comes in. But being highly reactionary means forecasts will likely change, possibly meaning each dot has a quick expiration date.

“To be more data dependent, the Fed needs a lot of flexibility,” Sweet says. “The dot plot isn’t a forecast. It’s not a commitment. Interest rate projections change as the economy changes, as developments in financial markets change. The dot plot gets dated pretty quickly.”

There’s also the chance that it can be misinterpreted – or ignored. Wall Street panicked in December, after the Fed delivered a hawkish post-meeting statement that called for “further, gradual increases” and published a dot plot that mapped out two more increases in 2019.

Though Powell emphasized that the Fed’s policy decisions “are not on a preset course and will change if the incoming data materially change the outlook,” the meeting still helped send stocks to their worst December since the Great Depression.

Even Fed officials have questioned just how helpful the Fed’s dot plot can really be.

“A few participants expressed concerns that in the current environment of increased uncertainty, the policy rate projections prepared as part of the Summary of Economic Projections do not accurately convey the Committee’s policy outlook,” records of the Fed’s January 2019 meeting said.

Though Powell has often said the chart leads to confusion, he also said in a March 2019 address that it “can be a constructive element of comprehensive policy communication” if it’s properly understood.

The dot plot increases transparency over Fed operations, according to Julia Coronado, president and founder of MacroPolicy Perspectives, who used to work for the Fed’s board of governors.

“The Fed feels like it really does need to explain and justify why it’s doing what it’s doing. The dot plot and the SEP is one element of a policy of transparency,” Coronado says. “But that doesn’t mean it’s useful for the public or for markets. It can be confusing, and it can be misleading.”

The public also has a chance to see the full range of views on the Federal Open Market Committee (FOMC). Regional presidents who don’t have a vote, for example, can still input their rate projections. But that can often mean there’s more noise than signal since there’s no telling how each leader arrived at his or her own forecast, and only 12 members have a vote.

“Is that really conveying useful information? That’s very debatable,” says Jonathan Wright, professor of economics at Johns Hopkins University. “Some people think it just creates confusion or a mixed signal.”

Written by
Sarah Foster
U.S. economy reporter
Sarah Foster covers the Federal Reserve, the U.S. economy and economic policy. She previously worked for Bloomberg News, the Chicago Tribune and the Chicago Daily Herald.
Edited by
Banking editor