The US Federal Reserve's Federal Open Market Committee (FOMC), in its June 18th meeting, kept the key lending rate unchanged. However, the central bank expects to cut the rates two times, as indicated by the dot plot.
The dot plot is a graphical representation that displays how frequently a particular value appears using dots. It is a simple charting method used for small data sets. The Federal Reserve’s dot plot specifically illustrates the interest rate projections of Federal Open Market Committee (FOMC) members over different time periods.
Federal Reserve's Latest Dot Plot
The above chart indicates that seven FOMC member assumes that the key lending rate should be maintained between 4.25 percent and 4.5 percent. Two members believe that the rates should be in the range of 4-4.25 percent, while eight feel they should be slashed to the around 3.75-4 percent.
Further, two members of the FOMC believe that the Federal Reserve should trim the lending rate by 75 basis points, or three times to 3.5-3.75 percent.
Discussing the significant divergence in views, the Fed Chair said, "Parties have a diversity of forecasts, and they do align with where their dots are. So if you have a higher inflation forecast, you're going to be less likely to be seeing more cuts."
"People can look at the same data and they can evaluate the risks differently, as you know. And that includes, the risk of hiring inflation, the risk of the be more persistent, the risk of the labour market will weaken," he added.
Also Read | Federal Reserve keeps interest rate unchanged in June meeting, sees two rate cuts this year
Since the highest number of Fed officials believe the lending rate should be around 50 basis points lower, the markets are pricing in two more rate cuts through 2025. For context, the Fed has also reduced policy rates by a cumulative 100 basis points in the last three meetings this year.
Currently, the FOMC consists of 19 members, including Federal Reserve Chair Jerome Powell. Analysts closely examine changes in dot plots across FOMC meetings to gauge shifts in the Federal Reserve’s policy outlook over time. Therefore, it can be understood that 12 out of the 19 officials assume that rates should be cut at least once next year while 10 assume more than two rate cuts.
The dot plot was created to give investors, economists and experts 'aggressive forward guidance'. However, despite attempting to guide economic activity, the dot plot isn't always an effective tool.
Even the Federal governor isn't too fond of the dot plots. He once remarked, "If you are too focused on a few dots, you may miss the larger picture,” he said.
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