Deciphering the Federal Reserve’s Dot Plot: What It Means for Interest Rates and the Economy

Market watchers were eagerly awaiting the release of the Federal Reserve officials’ expectations for future rate cuts. The latest projections, known as the “dot plot,” were released alongside the decision to cut interest rates for the first time since 2020. The dot plot provides insights into the central bank’s economic projections and where interest rates may be headed in the future.

The Dot Plot: A Roadmap for Interest Rates

The dot plot is released four times a year at every other Federal Open Market Committee (FOMC) meeting. It consists of a graph with dots representing each of the 19 committee members’ projections for future interest rates. While the median result is often seen as the Fed’s overall projection, individual members’ opinions can vary.

Some market watchers argue that the dot plot paints an unclear picture of the future and prefer to focus on other indicators. However, it remains a closely followed tool for investors trying to gauge the central bank’s intentions.

The latest dot plot showed that the Fed could cut another half-percentage point from interest rates this year and another full percentage point in 2025. This projection is slightly less aggressive than what futures traders expect, as they anticipate 75 basis points of cuts this year.

Interest Rates for the Rest of 2024

According to the dot plot, nine members of the committee foresee at least 50 basis points of cuts through the end of the year. Another seven members expect just one more cut of 25 basis points. Two members believe rates should stay at their current level, while one member believes steeper cuts are necessary.

If the Fed follows these projections, it could make quarter-percentage point rate cuts at its November and December meetings or a half-percentage point cut at just one meeting. This would result in interest rates of 4.25% to 4.5% going into 2025.

However, some economists, like Ryan Sweet from Oxford Economics, expect 25-basis-point cuts at the next two meetings. Federal Reserve Chair Jerome Powell emphasized that the committee members are not in a rush to cut interest rates and that the process will take place gradually.

Interest Rates for 2025 and Beyond

The dot plot also provides insights into interest rate projections for 2025 and beyond. At least eight members believe rates will be between 2.75% and 3.25%, while another nine members see rates above 3.75%. The median rate projection for 2025 is 3.4%, a full percentage point below 2024. Beyond that, the Fed officials expect interest rates to settle near 2.9%.

Economists believe that lowering borrowing costs will stimulate economic growth and support stock market gains. As long as the economy remains strong and inflation remains low, lower interest rates and strong earnings growth can continue to drive stocks higher in the long term.

The Unemployment Rate

The dot plot also provides insights into the committee members’ projections for the unemployment rate. Ten members expect the unemployment rate to rise to between 4.4% and 4.5%, while the remaining members believe it will remain near its current level of 4.2% for the rest of the year.

The projections indicate that Fed officials expect the unemployment rate to worsen before improving. Concerns about a slowing job market were one of the factors that led to the larger-than-expected rate cut. However, the projections for 2025 and beyond suggest that the job market will likely remain healthy.

Overall, the dot plot provides valuable insights into the Federal Reserve’s expectations for interest rates and the economy. While individual projections may vary, the dot plot helps investors and market watchers understand the central bank’s intentions and make informed decisions.

Sources:
Investopedia