Fed Officials Are Divided in Their Interest-Rate Outlook. How to Make Sense of the ‘Dot Plot.’

A worker painting the eagle statue on the Marriner S. Eccles Federal Reserve Board Building in Washington, D.C. (Kevin Dietsch/Getty Images)

Key Points

About This Summary

• The Federal Reserve cut interest rates by a quarter of a percentage point, but future rate direction is uncertain.
• The Fed’s dot plot shows a wide dispersion in policymakers’ views on the future path of the federal funds rate.
• The Fed’s Summary reflects concerns about the labor market and the potential for slower growth and higher prices.

The Federal Reserve cut interest rates this past week by a quarter of a percentage point. But where rates go from here is a coin toss, at best, given that Fed members’ latest forecasts diverge widely. Even Fed Chair Jerome Powell conceded that confidence is in short supply.

Yet, markets mistakenly cling to the central bank’s projections, even though they are usually the first word, and not the last, on the trajectory of rates.

Fed officials publish a Summary of Economic Projections, or SEP, four times a year in concert with meetings of the Federal Open Market Committee, the Fed’s policy-setting arm. The SEP is a bundle of charts that includes individual FOMC members’ anonymous estimates for growth, inflation, unemployment, and the path of interest rates over the next three years. The so-called dot plot, which shows where each policymaker expects rates to be in the future, usually draws the most attention.

Investors treat the dot plot as a policy guide, and often latch on to the median dot as the definitive rate projection. But the dispersion around the median is just as important, and sometimes more revealing. That was arguably the case with the dot plot released after the FOMC’s Sept. 16-17 meeting, which reflected an unusually wide dispersion in policymakers’ views about where the federal-funds rate is heading.

In June, the median dot pointed to two quarter-percentage-point rate cuts in 2025. But this month, the median indicated three such cuts, including the latest cut, announced on Wednesday.

The dispersions, however, are hard to ignore. One FOMC member envisions one interest-rate hike before year end, six see no change, nine expect a half-point of additional cuts, and one forecasts more than a full percentage point of easing. “That is a remarkably wide range of opinion about decisions that aren’t far in the future,” said Bill Adamas, chief economist at Comerica.

Officials’ predictions for next year are all over the map, or plot. Based on the medians, they expect core inflation, as measured by the personal consumption expenditures price index, to be 2.6% in 2026, up from a forecast of 2.4% in June. They see the unemployment rate at 4.4%, down from a forecast of 4.5% in June. Stronger growth, firmer inflation, and lower joblessness would usually make the case for tighter policy. But the median projection for 2026 shows rates falling about a quarter of a percentage point from year-end 2025, even as inflation holds steady.

Liz Thomas, head of investment strategy at SoFi, described it as “relationship problems”—the expected links between growth, inflation, and policy no longer add up.

The pattern “seems somewhat incongruent,” said Neil Dutta of Renaissance Macro.

Even Fed officials admit to a lack of confidence in their forecasts. “I think right now is a particularly challenging time, even more than usual,” Powell said at his postmeeting news conference. “Ask any of the forecasters whether they have great confidence in their forecast—I think they’ll honestly say [they aren’t confident].”

To be fair, the Fed’s forecasting problems don’t exist in a vacuum. Federal policy is one of the biggest sources of uncertainty. Tariffs shift with little warning, and immigration policy is reshaping the employment landscape in ways that are hard to model. Deregulation in certain sectors has also altered the outlook for growth and inflation.

Economic and rate projections are a relatively recent addition to the Fed’s tool kit. Former Chair Ben Bernanke introduced the SEP in 2007 as part of a push for greater transparency. Yet some former Fed officials, including Bernanke, have since called for more narrative context around the projections. Other economists argue that the dot plot should be scrapped altogether because financial markets and the public often misinterpret it as a definitive signal of future rate moves. This can create a disconnect between the Fed’s intent to provide transparency and the market’s reaction.

Still, the projections offer a snapshot of what is top of mind for policymakers, even if they don’t line up neatly. This month’s release made clear that the balance of concern has shifted toward the labor market. Powell described last week’s cut as a “risk management” move aimed at preventing further weakening.

The dispersion of dots also has value in highlighting the issues dividing the committee, from how sticky inflation will be to whether the labor market has hit an inflection point.

Joe Brusuelas, chief economist at RSM US, read the Summary of Economic Projections as pointing to “stagflation-lite”: softer growth and higher prices. In that sense, the SEP is less a forecast than a barometer of what worries Fed officials most.

Write to Nicole Goodkind at nicole.goodkind@barrons.com.