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What is the Fed's dot plot and why is it important?

Key takeaways

  • The dot plot is a visual representation of where top Fed policymakers think the key federal funds rate is headed.
  • The Fed has published the dot plot quarterly since 2012 as part of its drive toward transparency.
  • Currently, the dot plot suggests the fed funds rate may begin declining late this year before leveling off in 2026.

When will interest rates come down? An important clue lies in the Federal Reserve’s dot plot.

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What is the Fed’s dot plot?

The Fed’s dot plot is a chart published quarterly that shows where each member of the Fed’s policymaking committee expects interest rates to be over the next few years.

This is important because the Fed sets the nation’s benchmark interest rate, the federal funds rate. Rates for business, consumers, and investors all are connected to this interest rate, some directly and some indirectly.

The federal funds rate is a tool the Fed uses to achieve its “dual mandate”: low unemployment and low inflation. Raising interest rates tends to cool off the economy, bringing down inflation but risking higher unemployment. Conversely, lowering rates tends to goose investment and spending in the economy, lowering unemployment but risking higher inflation. It’s a delicate balance.

To help the public understand its thinking, the Fed publishes the dot plot quarterly as part of its Summary of Economic Projections, in conjunction with its December, March, June, and September meetings. To see it for yourself, visit the FOMC’s meeting calendar, look for “projection materials,” and you can download the PDF.

How do you read the Fed’s dot plot?

Reading the Fed’s dot plot itself is straightforward. Here’s an annotated recreation of the June 2024 dot plot to guide you through it:

An annotated dot plot, explaining that each dot represents the estimate of one Fed policymaker. Estimates are for the end of each calendar year, plus a
Source: Federal Reserve Board Summary of Economic Projections, June 2024

What the chart shows:

  • Vertical (Y) axis: The target percent for the federal funds rate.
  • Horizontal (X) axis: This shows 3 years—the current calendar year and the next 2—plus the “longer run.” Each year indicates expectations for the end of that year. The “longer run” column estimates what a “neutral” interest rate might be, which would neither heat up nor cool down the economy.
  • The dots: Each column contains one dot that represents the outlook of one member of the Federal Reserve Board’s policymaking group, the Open Market Committee. If the individual expects the target range at the end of the year to be 4.25–4.50%, the dot would be placed midway between those marks.

How do you interpret the Fed’s dot plot?

Now that you know what you’re looking at, here are a few things to look for as you try to interpret the Fed’s dot plot:

  • Trends: You can see roughly the direction policymakers think interest rates may take over the next few years.
  • Clusters: There are often outliers, but where the dots cluster begins to show agreement among the policymakers.
An annotated dot plot, showing that the trend suggests rates may drop through 2025 before leveling out in 2026. The plot shows some individual outliers but there is a good amount of agreement through 2026, when estimates cluster around 2.5 to 3.5 percent.
Source: Federal Reserve Board Summary of Economic Projections, June 2024

You can also look for shifts from one quarter’s dot plot to the next:

Graphic shows comparison between March and June 2024. Expectations have shifted somewhat higher and are clustering around 5.0–5.25%.
Source: Federal Reserve Board Summary of Economic Projections, March 2024 and June 2024

How much does the Fed’s dot plot change?

Remember that the dot plot represents the best guesses of the Fed’s policymakers about where interest rates will be months or years in advance. These best guesses are bound to change as the target date gets closer and economic data grows clearer.

Here’s a look at how the dot plot for December 2024 has changed over the past 2 years. The Fed began raising rates to combat inflation in March 2022. At the same time, it was predicting where rates might be in December 2024.

As you can see, expectations rose quickly before flattening out. The past 2 quarters, the dots have started to cluster around 5.0–5.25%.

Graphic shows each dot plot for December 2024, starting more than 2 years in advance, with June 2022. Estimates crept higher until September 2023, but have started to coalesce somewhat lower since December 2023.
Source: Federal Reserve Board Summary of Economic Projections, quarterly, June 2022 through June 2024

Why does the Fed’s dot plot change?

The Fed’s dot plot changes as policymakers adjust how high (or low) they think rates will need to be in order to keep inflation low and employment high. In forming these projections, policymakers keep a close eye on 4 key economic indicators.

  • Change in real gross domestic product: This shows how much the economy is growing, after discounting the effects of inflation.
  • Unemployment rate: One of the Fed’s mandates is to try to keep unemployment low, although it has not set a specific target. It’s also a useful and timely indicator of the overall strength of the economy.
  • PCE inflation: The Personal Consumption Expenditures price index is one way of measuring inflation. The Consumer Price Index, which most people associate with inflation, measures the price change in a basket of specific goods and services. The PCE captures changes in household spending. For example, CPI might tell us the price of steak is going up, but it doesn’t show the effect of consumers switching to hamburger to cut their grocery bills. PCE, on the other hand, captures the change in how much people are actually spending.
  • “Core” PCE inflation: “Core” inflation rates strip out the prices of food and energy, not because they aren’t important to consumers, but because those prices can be so volatile. It helps show how entrenched inflation is in the rest of the economy.

As part of its quarterly Summary of Economic Projections, the Fed’s policymakers estimate where these 4 indicators will be over the next few years. If they deviate from expectations, it can lead to changes in expectations for interest rates down the road.

The following chart shows the range of expectations for where these indicators may be at the end of 2024, as of June 2024:

Graphic shows estimates for economic indicators, with GDP growth between 1.4% and 2.7%; unemployment rate between 3.8% and 4.4%; PCE inflation between 2.5% and 3.0%; and core PCE inflation between 2.7% and 3.2%.
Projections are an average for Q4 2024, as of the June 2024 Summary of Economic Projections. Most recent readings: GDP, annualized growth rate for Q1 2024, Bureau of Economic Analysis; unemployment rate for May, US Bureau of Labor Statistics; PCE and Core PCE for April, year-over-year percent change, Bureau of Economic Analysis.

Why the Fed’s dot plot is important

The market has always been sensitive to changes in the federal funds rate. But until 1997, they often came as a surprise. It wasn’t until August 1997 that the Fed acknowledged that it used a target for the federal funds rate as its main policy tool. Since then, it has become more and more transparent about its policy targets and its considerations, so there are few big surprises to shake up the market.

Since 2012, the Fed has published the dot plot as part of this drive toward transparency, and the market now parses the dot plot for hints and clues. It is rarely taken by surprise.

To keep up with the latest news on interest rates from Fidelity Viewpoints, check out our latest Federal Reserve article or read more market insights.

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