After the Federal Reserve’s latest interest rate decision, you may be tempted to try and start connecting some dots.

That’s because U.S. central bankers updated their closely scrutinized “Summary of Economic Projections” (SEP) at their September meeting, which includes a chart that many Fed watchers obsess over: the “dot plot.” This graphic indicates to consumers where each Fed official sees interest rates rising — or falling — in the future, currently through 2026.

Officials signaled in those updated projections that they see one more rate hike this year, a move that would bring the Fed’s key rate to a new target range of 5.5-5.75 percent. They also now see just half a percentage point worth of cuts in 2024 on the expectation that inflation and economic growth will gradually slow. Those estimates signal policymakers are prepared to keep rates higher for longer. Just last quarter, officials expected to cut rates by a full percentage point.

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 inflation and the labor market comes in.

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 updated quarterly that records each Fed official’s projection for the central bank’s key short-term interest rate, the federal funds 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.

The Fed usually updates its projections at the end of each quarter, starting in March, followed by June, September and then December. The Fed’s March and June projections extend through the next two years, while the Fed begins estimating rates out into a third year in its September and December updates.

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.

When the U.S. economy looks extraordinarily uncertain, however, officials may choose not to publish new projections. Officials in March 2020, for example, didn’t update their rate estimates at their usual cadence because the pandemic’s impact seemed unknowable.

Each dot represents one Fed official — from Fed Chair Jerome Powell and Vice Chair for Supervision Michael Barr, to New York Fed President John Williams and Chicago Fed President Austan Goolsbee. When the Fed is fully staffed, the dot plot has 19 individual projections. Of course, it’s all kept anonymous, and no one knows which official is which dot.

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

Key benefits of reading the Fed’s dot plot

Fed's projections for September 2023 show one more rate hike this year and just half a percentage points of cuts in 2024
Source: Federal Open Market Committee (FOMC)

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, the Fed’s latest projections show that seven officials see no more rate hikes this year, while 12 see one more — suggesting the Fed is leaning on the more hawkish side. Most Fed watchers focus on the Fed’s median dot as the Federal Open Market Committee (FOMC)’s baseline projection.

It may sound daunting, but consumers can use it to help guide their financial decisions. Say you’re wondering when to lock in a certificate of deposit (CD), and you want to snag a bank’s highest offer. You may be able to glean whether rates have already peaked just by looking at the Fed’s projections.

The downside of the Fed’s dot plot

But there are obvious caveats. For starters, the future never evolves exactly as the Fed expects. Case in point: The Fed in December 2021 penciled in a 0.75-1 percent target range for its key benchmark rate by the end of 2022. Rates would end up soaring to 4.25-4.5 percent.

The further out into the future officials go, the harder it also becomes for them to predict what’s going to happen to the U.S. economy. In December 2020, when the U.S. economy was still deep in the trench of the coronavirus pandemic-induced recession and before inflation became a clear threat, most officials saw rates holding at near-zero percent through the end of 2023.

Not to mention, policymakers never penciled in projections for a rock bottom 0-0.25 percent interest rate for 2020 when they updated their forecasts in December 2019 — simply because they’d never imagined that a global pandemic could send the economy into shock.

“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, managing 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.

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, chief economist at Oxford Economics.

The tool recognizes just how powerful Fed communication can be at guiding economic activity. If the Fed has properly foreshadowed their rate plans, financial markets will have already priced in a move by the time it actually happens, impacting the borrowing costs that consumers pay. In other words, rates don’t have to wait for the Fed to start moving up.

Take mortgage rates, for example. The average 30-year fixed-rate mortgage was 3.28 percent when the Fed officially signaled in its December 2021 dot plot that it planned to raise interest rates in the upcoming year. But by the time the Fed officially followed through with that rate hike, the average rate had already jumped 1.14 percentage points to 4.4 percent, Bankrate data shows. That coincided with a rapid run-up in the 10-year Treasury yield, as financial markets began pricing in the prospect of hotter inflation and higher rates.

Why you might not want to place too much focus on the dot plot as the Fed fights inflation

Powell himself has questioned the usefulness of his committee’s dots. In the footnotes of a quippy 2019 congressional testimony, Powell included a photo of Seurat’s famous “A Sunday Afternoon on the Island of La Grande Jatte” painting that was so zoomed in it became distorted.

“As you can see, if you are too focused on a few dots, you may miss the larger picture,” he said, demonstrating what he called a “cautionary tale” about reading the Fed’s dot plots as gospel.

The stakes of misinterpreting the Fed’s rate plans may be even greater this time around. The economy — and more specifically inflation — is guiding the Fed’s interest rate decisions. Whether the Fed raises interest rates again this year depends on whether price pressures cool as much as policymakers expect.

As the Fed judges just how many more times to lift rates to cool inflation, Powell has repeated that officials want to be flexible with their rate hike path, being “data-dependent” and responding to new information 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.”

Consumer prices in August rose 3.7 percent from a year ago, according to the Department of Labor’s consumer price index (CPI). So-called “core” prices when excluding food and energy are up a hotter 4.3 percent.

The Fed, however, looks at a separate gauge — the personal consumption expenditures (PCE) index — when determining just how high prices are above its 2 percent target. That measure is expected to rise by 3.3 percent in the fourth quarter of 2023 from a year ago, the Fed’s new projections show. Core prices could reach 3.7 percent, down from its current level of 4.2 percent. Yet, 16 officials note a higher uncertainty about inflation, with the majority saying that the risks of higher inflation are greater than the chances of lower-than-expected inflation.

Powell said in a March 2019 address that the chart “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,” 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 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. Each dot reflects a rate move the committee hasn’t come to consensus on, and every policymaker could have a different baseline forecast that led them to that assumption.

“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.”