What Is the U.S. Federal Reserve Dot Plot?
Understanding this critical news release
U.S. Federal Reserve policy is critical to all global financial markets, so any insight into what the Fed is thinking always gets a great deal of attention from investors. One way investors try to glean insights into Fed thinking is by using the “dot plot.” Since its introduction in 2011, this chart has become one of the most closely watched news releases among investors.
What Is the Dot Plot?
The dot plot represents the Fed’s ongoing effort to become more transparent about its policies. It's published quarterly. It shows the projections of the 12 members of the Federal Open Market Committee (FOMC), the rate-setting body within the Fed. That committee is made of up of the Fed's seven members of the board of governors, and the president of the Federal Reserve Bank of New York.
The remaining four seats are filled on a rotating basis by presidents from the remaining 11 Fed banks. These presidents serve one-year terms. One is chosen from each of the following groupings of Fed banks:
- Boston, Philadelphia, and Richmond
- Chicago and Cleveland
- Dallas, St. Louis, and Atlanta
- San Francisco, Kansas City, and Minneapolis
Each dot on the chart represents a member’s view of where the federal funds rate should be at the end of the various calendar years shown, as well as in the "longer run" (the peak for the federal funds rate after the Fed has finished tightening or “normalizing” policy from its current levels).
While only 12 members serve on the FOMC at a time, the dot plot includes opinions (dots on the chart) from each Fed bank president, for a total of 19 dots. Their opinions matter because dot plots include long-term predictions, and four of the FOMC's 12 seats are rotated annually.
However, as of November 2019, there are two open seats on the board of the governors. Because of those ongoing vacancies, dot plots currently only include 17 dots.
For the dot plot released in September 2019, the members' average expectation is for rates to fall between 1.75% and 2% by the end of the year. The average long-term rate expectation is 2.5%. As of October 31, 2019, the Fed's current target for the federal funds rate is 1.5% to 1.75%.
More important than the absolute number for the projections is the direction of movement. Investors want to know whether the FOMC is leaning toward looser monetary policy (reducing rates) or tighter policy (raising rates). For example, a shift toward higher rates in the dot plot in March 2014 led to a short-term sell-off in both stocks and bonds, a reflection of investors’ fear that the Fed might raise rates sooner than expected.
The current dot plot includes projections for 2019, 2020, 2021, 2022, and "longer run."
What the Dot Plot Isn’t
Keep in mind, when you're looking at the chart, that each dot represents a member’s view of the range where rates should be at that time. Their dot is in the center of the range. In other words, the dots shouldn’t be taken to represent that a member is targeting that specific number.
It’s also important to remember that the Fed remains data-dependent, and it adjusts its policy based on economic trends, inflation, and global events. In the event of major developments, such as a terrorist attack, a severe economic downturn, or a sharp jump in inflation, the most recent dot chart may no longer represent member projections. As a result, the longer-term projections on the dot plot carry less weight than those that are closer to the present. Changes among Fed leadership—as terms expire, people resign, and others step up to fill the vacated positions—add to the potential for long-term policy shifts.
There's no way to tell which dot belongs to which member, so investors don’t have a sense of how much weight to attach to any outlier dots. There's no way to tell which dot belongs to 2019 Fed Chair Jerome Powell, and which belongs to a Fed bank president that isn't currently a member of the FOMC.
Naturally, this won’t stop market participants from reading a great deal into the specific averages that are generated by each new iteration of the dot plot. Bond investors should expect that this release will be a new source of market volatility after each Fed meeting. Former Fed Chair Janet Yellen warned that people “should not look at the dot plot as the primary way in which the Committee is speaking to the public at large.”
The Bottom Line
As is the case with any single indicator, be careful not to read too much into the dot plot. It can be one more helpful tool to add to your financial tool belt, but the best investors take in as much information as they can, from as many indicators as are available.
The U.S. Federal Reserve. "Chair's FOMC Press Conference Projections Materials, September 18, 2019." Accessed Nov. 22, 2019.
The U.S. Federal Reserve. "Federal Reserve Board - Open Market Operations." Nov. 22, 2019.