FOMC Dot Plot

A chart that summarizes the FOMC’s outlook for the federal funds rate

What is the FOMC Dot Plot?

The FOMC (Federal Open Market Committee) dot plot, alternatively called the Fed’s dot plot, is a chart that summarizes the FOMC’s outlook for the federal funds rate. It is published quarterly and watched closely by investors and economists for indications on the future trajectory of the federal funds rate.

The image below shows the June 2021 FOMC dot plot. (We will revisit the image later for a discussion on its interpretation).

FOMC Dot Plot - Image of Fed Funds Target Rate Chart — Source: Bloomberg

Summary

The FOMC dot plot summarizes the FOMC’s outlook for the federal funds rate.
It was introduced in 2012 as an effort by the Federal Reserve to be more transparent regarding its policies.
Investors and economists commonly compare the most recent FOMC dot plot to previous FOMC dot plots to obtain an indication of the direction (hawkish or dovish) of monetary policy.

Understanding the FOMC Dot Plot

History

In 2012, the US economy was recovering from the 2008 Global Financial Crisis, and interest rates were near zero. At the time, the Federal Reserve wanted to provide the public with an advance look at what policies the Fed officials were considering over the short and longer-term time horizon.

As a result, the FOMC dot plot was introduced by the Federal Reserve to be more transparent regarding its policies.

How It Works

Up to 19 Fed officials can contribute a dot anonymously (meaning no dots are “identified”) to each varying calendar year of the FOMC dot plot to indicate where they believe the federal funds rate should be.

The 19 Fed officials who can contribute a dot to the FOMC dot plot include seven members of the Board of Governors of the Federal Reserve System and presidents of the 12 regional banks.

The actual number of dots per year can be lower than 19 if there are vacancies on the Board of Governors of the Federal Reserve System. For example, in the March 2019 FOMC dot plot, there were only 17 dots for each calendar year due to two vacancies on the Board of Governors of the Federal Reserve System.

The FOMC Dot Plot as a Forecast of Future Federal Funds Rate

Although the FOMC dot plot is commonly viewed by investors and economics for gauging potential changes in monetary policy, Fed officials have indicated to not place great emphasis on the FOMC dot plot. This is because the Federal Reserve is data-dependent, meaning their monetary policy depends heavily on economic trends, inflation, and global events.

For example, the December 2019 FOMC dot plot indicated no action on the federal funds rate in 2020. However, due to the coronavirus pandemic, the Federal Reserve altered the federal funds rate by setting it near zero. As stated by Fed Chair Jerome Powell in his June 2021 FOMC meeting: “the dots are not a greater forecaster of future rate moves … it’s because it’s so highly uncertain”.

How to Interpret the FOMC Dot Plot

The June 2021 FOMC dot plot is reproduced below:

FOMC Dot Plot - June 2021 — Source: Bloomberg

Before interpreting the FOMC dot plot, there are some key things to note:

The X-axis represents years, while the Y-axis represents the target fed futures target rate.
Each dot represents the middle of a range. For example, in the 2021 column, the dots plotted at 0.125% actually represent the range 0.00% to 0.25%.
The green line illustrates the median of the FOMC dots.

Interpretation of the June 2021 FOMC Dot Plot

2021

By year-end 2021, all 18 Fed officials believe that the fed funds target rate should be in the range of 0.00% to 0.25%.

The median FOMC dot indicates a fed funds target rate of 0.00% to 0.25% in 2021.

2022

By year-end 2022:

11 Fed officials believe that the fed funds target rate should be in the range of 0.00% to 0.25%
5 Fed officials believe that the fed funds target rate should be in the range of 0.25% to 0.50%
2 Fed officials believe that the fed funds target rate should be in the range of 0.50% to 0.75%.

The median FOMC dot indicates a fed funds target rate of 0.00% to 0.25% in 2022.

2023

By year-end 2023:

5 Fed officials believe that the fed funds target rate should be in the range of 0.00% to 0.25%
2 Fed officials believe that the fed funds target rate should be in the range of 0.25% to 0.50%
3 Fed officials believe that the fed funds target rate should be in the range of 0.50% to 0.75%
3 Fed officials believe that the fed funds target rate should be in the range of 0.75% to 1.00%
3 Fed officials believe that the fed funds target rate should be in the range of 1.00% to 1.25%
2 Fed officials believe that the fed funds target rate should be in the range of 1.50% to 1.75%

The median FOMC dot indicates a fed funds target rate of 0.50% to 0.75% in 2023.

Longer Term

Over the longer term:

1 Fed official believe that the fed funds target rate should be in the range of 1.88% to 2.13%
4 Fed officials believe that the fed funds target rate should be in the range of 2.13% to 2.38%
1 Fed official believe that the fed funds target rate should in the range of 2.25% to 2.50%
8 Fed officials believe that the fed funds target rate should be in the range of 2.38% to 2.63%
1 Fed official believe that the fed funds target rate should be in the range of 2.63% to 2.88%
2 Fed officials believe that the fed funds target rate should be in the range of 2.88% to 3.13%
1 Fed official did not submit longer-run projections for the fed funds rate

The median FOMC dot indicates a fed funds target rate of 2.38% to 2.63% over the longer term.

How is the FOMC Dot Plot Commonly Used?

Investors and economists commonly compare the most recent FOMC dot plot to previous FOMC dot plots to obtain an indication of the direction (hawkish or dovish) of monetary policy. Below is a comparison of the June 2021 FOMC dot plot to the March 2021 FOMC dot plot (denoted as grey dots).

FOMC Dot Plot - June 2021 vs March 2021

By comparing the June 2021 FOMC dot plot to the March 2021 FOMC dot plot, one can notice that in 2023, a number of Fed officials shifted their dot plots upwards. It caused the median FOMC dot in 2023 to shift from 0.00%-0.25% to 0.50%-0.75%, indicating a potential rate hike in 2023 and a hawkish shift in monetary policy.

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