How to read the Fed's updated dot plot

The Federal Reserve has left its key interest rate unchanged as inflation cools. However, the central bank did change its projection of future rates, pricing in only one cut this year. Yahoo Finance's Alexandra Canal breaks down the Fed's "dot plot" and what it signals about rate cuts.

The dot plot, released each quarter, is a chart that tracks each of the 19 Fed officials' federal funds rate projections. Four Fed officials believe funds will stay where they are, while seven believe there will be one rate cut. Eight officials, however, believe that there will be two cuts. The aggregate median coming out of this quarter's dot plot sits at just one rate cut priced in for the year.

Canal emphasizes that while the dot plot is simply a projection, it is an important tool for transparency. The dot plot was first introduced after the 2008 financial crisis, providing investors with some economic transparency.

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This post was written by Melanie Riehl

Transcripción del vídeo

The fed has left its key interest rate unchanged as it continues its mission to fight inflation.

However, the FED did make a change to projections of future rates.

The central bank pricing in only one cut this year.

Yahoo finances Alexandra Canal has more on the dot plot.

Yes, Brad Wall Street is Abuzz with the talk of the fed and this dot plot, but it's not uncommon to feel a little bit confused when talking about this kind of data.

So we wanted to break it down in an adjustable way for viewers and answer this one question.

What is the dot plot and what it simply the dot plot is a chart that tracks each one of the 19 beneficial projections for the federal funds rate.

And as you can see here, you'll have a collection of dots from 2024 2025 2026 and then longer term here.

And essentially this data is telling us where that officials think that that funds rate will be heading in the future.

It's release only four times a year usually at the end of each quarter.

And each dot represents a specific FO MC member but they are all anonymous.

So this thought here that could be fed Chair Jerome Powell, the other one over here that could be Chicago, that president all will be the whole point here is that we don't know.

Now, if we zoom in to 2024 you'll see four F officials right up here.

They think the F fund it's going to stay where they are.

We currently in a range between 5.25 percent and 5.5%.

So for they see that rates are going to be unchanged throughout the year.

However, if we look a little bit lower, we see all of these fed officials think that rates are going to come down seven, believe that we're going to see one cut eight, think we're going to see two cuts.

And then if you aggregate the median, that is just one cut that is pricing in for this year.

And again, this is just a projection from the fed and then turning over 2025 1 loan fed official things interest are going to stay where they are not come down at all.

And then we have this guy all the way down here, that's pricing in 10 cuts.

And then you have a lot of dispersion here since it becomes a little bit more difficult to predict rates into the future since we don't have the economic data yet.

So all of this may seem a little bit intimidating, but this can be a good tool to help you inform yourself about certain financial decisions.

Of course, as we know, interest rates affect various investment areas including mortgage rates, savings accounts and treasury yields among many others.

But it is important to remember that this is just a projection.

It's a guide of where fed officials think interest rates should go.

That doesn't necessarily mean that's where interest rates will go.

But it is an important tool when we think about transparency since the dot plot was first introduced in the aftermath of the 2008 financial crisis when many investors were nervous about the future path of interest rates.

So the dot P was created to give that transparency and you can think of it as the Feds crystal ball of sorts.

But again, like I alluded to, there is plenty of criticism surrounding the use of the dot That chair Jerome Powell himself.

He has tried to get people to understand that it is simply a projection and should not be taken as gospel yet.

It does remain a highly anticipated release every single quarter.

Brad.

All right.

Excellent breakdown.

Thanks so much.