What Does the Fed’s Dot Plot Really Mean?
03/10/23
By President and Chief Executive Officer Brian Ruisinger
Those of us from a certain generation may remember the first video game Pong, or the classic Etch-A-Sketch. Does the table here remind you of one of these blasts from the past? It actually represents how the governors of the Federal Reserve System provide their economic projections to the public and markets. The so-called dot plot is published by the Fed once per quarter after meetings of its 16-member Federal Open Market Committee (FOMC), the central bank’s policy-setting arm.
The chart here is from December 2022. Each dot represents a Fed Governor as well as the Chairman and shows their anonymous projection for the central bank’s short-term interest rate and the midpoint of the fed funds rate at the end of each calendar year three years into the future. They also provide a dot for the longer term point where rates are neither stimulating nor restricting economic growth.
The FOMC is voting on the Fed Funds rate, the rate at which commercial banks borrow and lend to each other overnight. The Prime Rate is calculated by adding 3.00% to this rate, which is the rate most commonly applied to the public, individual and corporate entities. Today’s Fed Funds rate is 4.75%, which equates to a Prime Rate of 7.75%, the highest in over a decade.
At present, the Fed is in an aggressive tightening posture having raised rates seven times in 2022 and once already in 2023. This dot plot shows the Governors expect to raise rates again in 2023 and then begin lowering rates in 2024 and 2025 with a longer run view of settling around 2.50% Fed Funds rate which would set the Prime Rate at 5.50%.
Our mission isn’t to develop strategies interpreting the dot plot results, but to educate and inform you of this important transparency tool the Fed rolled out in 2012 following the 2008 Recession to provide insight into the FOMC’s economic predictions.
While these are only indications at a quarterly point in time and subject to change as economic indicators vary, it’s certainly useful to indicate the direction of rates as you plan for your business and personal future decisions.
Now back to my Etch-a-Sketch.Someone shook it.