The Fed dot plot, released periodically by the Federal Open Market Committee (FOMC), indicates each FOMC member’s projections of the future federal funds rate. Each dot is anonymous and meant to give the public some insight into the members’ individual expectations.
The Fed dot plot offers further information for those who speculate about whether the committee might change interest rates, a time-honored tradition ahead of each Fed meeting. We’ll take a look at the latest Fed dot plot to help you understand how to read it and why it is important to you.
What is the Fed dot plot?
First implemented in 2012, the Fed dot plot is a simple chart that illustrates each FOMC member’s prediction for the federal funds rate over the next three years. More specifically, each Federal Reserve member anonymously indicates their own midpoint of target range for the federal funds rate for the end of each of the following three years. Each member’s dot reflects their own idea of the appropriate policy path to take in order to foster economic activity and maintain inflation around the Fed’s 2% target.
The Fed dot plot offers some transparency between the Fed and the public, providing a quick, user-friendly look at the future target range of the federal funds rate. Furthermore, it also provides some insight as to where Fed members think the economy as a whole might be going in the coming years.
The FOMC adjusts monetary policy according to the health of the U.S. economy, either hiking or cutting the federal funds rate to slow down an overheating economy or prop up flagging economic activity. Since the policy changes enacted by the FOMC affect almost every aspect of our financial lives, it helps to know what changes might be in store in the future. That way, you can better plan for things like lower mortgage rates or higher savings account rates.
The Fed dot plot is included in the Federal Reserve’s Summary of Economic Projections (SEP), which is released after every other Fed meeting. In addition to the dot plot, the SEP outlines the committee’s projections for GDP growth, inflation and the unemployment rate.
How to read the Fed dot plot
Take a look at the Fed’s most recent dot plot below, released after its December meeting. Each dot represents one FOMC member. No member of the public knows which official’s opinion is related to any given dot.
As it’s the end of the year, all voting members put their 2019 dot at the midpoint between 1.25% and 1.75% — the current range of the federal funds rate.
As we look toward 2020, most FOMC members project an unchanged federal funds rate for the new year. However, four members indicate some hopefulness for higher rates, plotting their projected midpoint between 1.75% and 2%.
The 2021 outlook is a bit more balanced, with dots ranging between 1.5% and 2.5%.
Only one member thinks the current policy will remain appropriate through 2022, while two members think we’ll reach right below a 3% midpoint mark.
Past 2022, or the “longer run” on the dot plot, members largely see the federal funds rate back at around 2.5%, recovering from its current lower state.
How the dot plot relates to you
The dot plot may seem like just another helping of financial jargon, only useful for economists and financial experts. But the rate forecast represented in the Fed dot plot can help you determine how your finances might be affected by the future Fed monetary policy decisions.
Let’s use December 2019’s dot plot above as an example. We rode the federal funds rate rollercoaster all throughout 2019, coming right off of a hike in December 2018, waiting through a pause period and then watching as rates fell over the course of three rate cuts in the second half of the year. It can be hard to know what to expect next from the Fed.
If you don’t have the tools to read the markets or the various economic data points, the dot plot would indicate to you it’s most likely the federal funds rate will remain the same in 2020 because that’s what members indicate. This bars any adjustments they might have to make to policy as a result of economic changes, which means that while the dot plot is a helpful indicator, it does not set a policy path in stone.
With rates likely to remain the same, you’re likely to see interest rates at financial institutions remain steady or drop a bit more.
You can also look at the dot plot to gauge how high — or how stagnant — interest rates may be in the next couple of years.
How not to use the Fed dot plot
The Fed dot plot can help us speculate about future Fed rate policy. However, if 2019 has taught us anything, it’s that things can change from one day to the next. Global trade negotiations have fluctuated and one month’s data reports can negate the prior month’s data.
The dots are merely the most likely outcomes for the federal funds rate, according to individual Fed members. “They are not a forecast of the group,” Chair Jerome Powell asserted at the June meeting press conference. “They’re not discussed or debated at the meeting. They’re an input to policy more than an output of policy.”
“If you pay too close attention to the dots, then you may lose sight of the larger picture,” he concluded, reiterating that same point in the December meeting press conference.
Essentially, don’t take each Fed dot plot release as a promise. Use it as a guide to better inform your own speculations, while keeping an eye on other economic climate factors. That way, when actual policy changes do occur, you’ll be more prepared.