How to Read the Fed’s Projections Like a Pro

Federal Reserve officials are scheduled to release both an interest-rate decision and a fresh set of economic projections on Wednesday, estimates that Wall Street has been eagerly awaiting in order to understand what next year might bring.

Officials are expected to leave interest rates unchanged in a range of 5.25 to 5.5 percent, the highest level in 22 years. Policymakers had forecast one final 2023 rate increase when they last released their quarterly economic projections, in September. But recent progress in the Fed’s fight against inflation has led investors to expect that the central bank’s next move will instead be to cut rates.

The question now is when the lowering of rates will begin — and how quickly borrowing costs will move down. For hints about that, investors will be looking at the Fed’s fresh forecasts. Here’s how to read the numbers.

The dot plot, decoded

When the central bank releases its Summary of Economic Projections each quarter, Fed watchers focus obsessively on one part in particular: the so-called dot plot.

The dot plot will show Fed policymakers’ estimates for interest rates at the end of the next several years and over the longer run. The forecasts are represented by dots arranged along a vertical scale — one dot for each of the Federal Open Market Committee members.

Economists closely watch how the range of 19 estimates is shifting, because it can give a hint at where policy is heading. They fixate most intently on the middle dot, currently the 10th. That middle, or median, official is regularly quoted as the clearest estimate of where the central bank sees policy heading.

The Fed is trying to wrestle down inflation, and to do that, officials have been lifting interest rates to slow spending, crimp business investment and expansion, and cool off the job market. The central bank moved rates up quickly between March 2022 and July 2023.

But policymakers have held rates steady since their July increase. And while officials, as of September, had expected one more move, to a range of 5.5 to 5.75 percent, they are now widely expected to leave interest rates unchanged at this meeting.

The question is how much they expect rates to fall in 2024. If policymakers see borrowing costs at 5.1 percent at the end of 2024, as they did as of September, that would imply just one quarter-point rate cut. If they move that forecast down to 4.8 percent, it would suggest they expect to lower rates twice.

One important trick for reading the dot plot? Pay attention to where the numbers fall in relation to the longer-run median projection. That number is sometimes called the “natural” or “neutral” rate, and it most recently stood at 2.5 percent. It represents the theoretical dividing line between easy and restrictive monetary policy.

What the Fed is saying when rates are above that neutral rate is that they are in economy-restricting territory.

Unemployment projections could be interesting

One of the biggest questions of this cycle of rate increases has been whether the Fed can pull off its task of lowering inflation without causing a big jump in joblessness — what economists often refer to as a “soft landing.”

Page two of the economic projections holds some hints about how Fed officials are thinking about that question.

Fed officials previously projected that unemployment would rise to 3.8 percent by the end of this year, then pop to 4.1 percent in 2024 and 2025. As of November, joblessness stood at 3.7 percent.

An interesting thing to watch on Wednesday will be whether policymakers still think they need notably softer labor market conditions in a world where inflation has already cooled significantly.

Watch the growth outlook

The road toward higher unemployment is paved with slower growth. To slow down the job market, officials typically think they need to cool the overall economy to below its potential — forcing it to walk when it is capable of running.

Growth has surprised the Fed all year, coming in especially strong in the third quarter. Given that, it will be worth watching whether policymakers still expect it to remain modest in 2024: They had previously expected just a 1.5 percent pace by the end of next year, well under the long-run sustainable pace of 1.8 percent.

Approach inflation estimates with caution

Fed officials are likely to predict that inflation will slow in the years to come, in part because they always do. By definition, the Summary of Economic Projections includes forecasts of what the economy will look like if policy is set appropriately — and appropriate policy means an interest rate level that drives inflation back to the Fed’s 2 percent goal over time.

Still, it will be notable just how quickly Fed officials think they can guide inflation fully back to target. In their latest forecast, officials didn’t expect to get back to target until 2026. But given recent progress, they may be feeling more optimistic now.