It’s probably the most closely scrutinized scatter chart in world financial markets. Every three months since January 2012, the Federal Reserve has sent analysts scurrying by updating its "dot plot," which has become the de facto monetary policy forecast of the U.S. central bank — whether the Fed wants it to be or not. It’s also an important source of clues to dissent within the Fed’s policy-making committee, even if it can be as cryptic as it is crucial. The big question about the Fed’s next dot plot, to be released Wednesday, is whether it will suggest four rate increases this year, instead of the median forecast in December for three.
1. What is plotted on the dot plot?
It’s a chart showing estimates of what the federal funds rate, the short-term interest rate controlled by the Fed, should be. Members of the rate-setting Federal Open Market Committee each assign a dot for what they view as the midpoint of the rate’s appropriate range at the end of each of the next three years and over the longer run. Investors focus on the median dot. As many as 19 monetary policy makers — the seven governors on the Fed Board in Washington and the presidents of the 12 regional banks — can contribute a dot. (This week, there will only be 15 dots as there are currently four vacancies on the board.)
2. Where does the dot plot stand now?
The latest dot plot, released after the FOMC’s December meeting, shows the federal funds rate rising gradually to a range of 3 percent to 3.25 percent by the end of 2020, from its current range of 1.25 percent to 1.5 percent.
3. What good is a projection of the fed funds rate?
The dot plot was invented in late 2011, at a time when Fed officials were considering how to prepare markets for the shift they hoped to make away from the unprecedented array of monetary support measures they’d put in place after the financial crisis. The Fed chairman at the time, Ben Bernanke, and Janet Yellen, who served as Bernanke’s deputy before a four-year stint as chair that ended last month, saw the dot plot as a way of giving markets a look into the Fed’s thinking beyond any immediate decision-making. FOMC statements focus mainly on current economic conditions and the immediate interest-rate target, though they’d evolved somewhat since the crisis and by December 2011 were offering investors forward guidance that rates would be held exceptionally low “at least through mid-2013.”
4. Why does it matter?
When the dot plot shifts, it can send a powerful message to investors on whether the U.S. central bank expects to speed up or slow down its planned tightening of monetary policy. It also creates a benchmark that can be used to highlight differences between the Fed’s official view and that of the financial markets. The central bank has been consistently more upbeat about its ability to lift inflation and, therefore, interest rates, than investors, though that gap narrowed during 2017 as economic growth picked up.
5. Can I tell which Fed official offered which dot?
No. The dot plot carries no names, so there’s no way to tell, say, which estimate was offered by the Fed chair (though analysts have their suspicions). The anonymous nature of the dot plot is one reason it has critics as well as fans.
6. What else do dot plot detractors say?
Maybe the biggest beefs are that the projections don’t reflect a commitment by the FOMC to act and that they aren’t an official consensus forecast, which would be a more powerful signal. (Fed staff explored hammering out a consensus dot, but officials decided that it would be too hard to get agreement among so many officials with such disparate views.) Each individual member may base his or her forecast on a different economic model or set of assumptions, which means there’s no consistency in how the dots are generated and no sense of the thinking behind them. Further complicating things, of the 12 regional Fed presidents, only five are voting members of the FOMC in any given year. That raises questions over how well the dots accurately reflect longer-term FOMC intentions.
7. What have Fed leaders said about the dots?
During her time as chair, Yellen’s view of the dot plot shifted between hot and not. In March 2014, at her first FOMC press conference as chair, she said, “one should not look to the dot plot, so to speak, as the primary way in which the Committee wants to or is speaking about policy to the public at large.” That was in response to a question asking her to explain an upward shift in the dot plot showing that more than half of Fed officials expected rates, which were still near zero, to be at 1 percent or above by the end of 2015. Fast forward two years. Global financial markets were in turmoil and Fed officials had just trimmed their forecast for the number of rate hikes that year to two from four in their previous dot plot. Rather than distancing herself from the downgrade, Yellen told reporters that the shift in dots “largely reflects a somewhat slower projected path for global growth” and a tightening in credit conditions.
8. Is the dot plot here to stay?
It’s possible. Jerome Powell, who took over from Yellen as chair in February, criticized the quarterly forecasts while he was a Fed governor in a speech in February 2016 that highlighted a number of these issues. As chairman, he’ll have a chance to do something about it, under any review of Fed communication strategy that he decides to undertake.
The Fed’s New Dot Plot
The Reference Shelf
- Bloomberg News articles on the puzzle the December dots set for the market, and on how Jay Powell’s promotion might change the dot outlook.
- An article on the history of the dot plot.
- A QuickTake on how different central banks apply the idea of forward guidance.
- A QuickTake Q&A on why measuring inflation is a tricky business.