FORECASTS & TRENDS E-LETTER
by Henry Rohlfs
December 19, 2023

IN THIS ISSUE:

1. What is the FOMC Dot Plot?

2. The Latest Dot Plot

3. What This Means for the US Economy

4. Closing Thoughts

I must first disclose I have never been to a fortune teller. But I understand there are some who are fascinated by the art of tasseography or identifying symbols and interpreting messages found in the shapes formed by tea leaves at the bottom of a cup.

Some might say the famous “dot plot” made by members of the Federal Open Market Committee (FOMC) is the economist’s version of reading tea leaves. Take a scoop of economic data, add them to a cup of prognostication, swirl three times, then close your eyes and pick your dot location. I’m sure it’s far more complicated and intentional than that. At least I hope it is.

The FOMC released its quarterly Summary of Economic Projections (SEP) last week, which includes the “Dot Plot” used by the Federal Reserve to communicate its policymakers' economic projections and expectations for the future. This chart provides a visual representation of individual committee members' forecasts, helping market participants, economists, and the public to gauge the central bank's outlook on key economic indicators. Today we will take a look at what the FOMC dot plot is, how to interpret the latest chart and what the FOMC is predicting for the economy.

What is the FOMC Dot Plot?

The FOMC “Dot Plot” is a scatter plot that displays the individual projections of Federal Reserve officials regarding the future path of federal funds rate estimates, the short-term interest rate controlled by the Federal Reserve. Each dot on the chart represents the projection of a single FOMC member for a specific time horizon.

The vertical axis displays interest rates. Committee members place dots on the chart to indicate their individual forecasts for the federal funds rate at the end of each specified year.

The horizontal axis of the chart represents different time periods. Typically, the chart includes projections for the current year and the next few years. Officials also provide a dot for the longer run, which represents the so-called “neutral rate of interest,” or the point where rates are neither stimulating nor restricting economic growth.

The dot plot is part of the Federal Reserve's commitment to transparency and effective communication. By providing a visual representation of policymakers' expectations, the central bank aims to reduce uncertainty in financial markets and among the public regarding its future policy actions. Discrepancies among individual projections can signal differing opinions on the appropriate course of action, providing valuable information on the likelihood of future rate hikes or cuts.

Fed officials started using the dot plot in 2012 at a time when the economy was still recovering from the Great Recession and when interest rates were still near zero.

It was a form of “aggressive forward guidance,” a concept that former chairman Ben Bernanke created to prepare markets for the Fed’s movement away from the unconventional support measures it introduced to keep the economy afloat, according to Ryan Sweet, chief economist at Oxford Economics.

The Latest Dot Plot

Below is the dot plot published in the FOMC’s latest SEP dated December 13, 2023. I’ve added a few notations to clearly show the median rate projections made by members and the direction they see rates moving over each year.

As the chart shows, the FOMC members unanimously agreed in their December meeting to hold the federal funds rate in the 5.25% to 5.5% range. When asked last Wednesday if interest rate increases have ended, Federal Reserve Chair Jerome Powell said the central bank is probably "close to the end of the cycle." This sent stock prices surging upward with the Dow Jones Industrial Average reaching a new high at Wednesday's close.

Now let’s look at the 2024 predictions. The median interest rate projection drops to 4.6%, a roughly 0.75%, or 75 basis point reduction. Only two members think no rate cuts will happen in 2024. All other members believe rate cuts to some degree will happen next year.

If we assume that the Federal Reserve will slowly drop interest rates by only 25 basis points per meeting, we should see three rate cuts next year. Many analysts believe the FOMC will hold interest rates at the current level for several months with cuts announced later in the year.

In fact, Fed officials have pushed back against bets on deeper and faster rate cuts. Chicago Fed President Austan Goolsbee said Sunday that it’s too early to declare victory over inflation. His New York counterpart, John Williams, said Friday that talk of rate cuts is "premature."

Looking into 2025 and beyond, it appears the Federal Reserve could continue to slowly reduce interest rates at about 75-100 basis points per year.

But remember, these predictions by the committee members can change at each meeting and often do. This is simply the way FOMC members read the tea leaves at the bottom of today’s economic teacup.

What This Means for the US Economy

The SEP also shows projections of Federal Reserve Board members and Federal Reserve Bank presidents for several key economic variables.

It appears that the FOMC does not believe a recession is on the horizon. They predict real GDP will drop moderately with inflation moving close to their 2.0 percent target in 2025. Only a small uptick in unemployment is projected.

The Congressional Budget Office (CBO) just released their economic projections report estimating the economy will grow 1.5% in 2024, practically matching the FOMC estimate. They also believe unemployment numbers will remain steady through 2026. Their report may not be purely positive, but the CBO does not believe the country will enter a bona fide economic downturn.

I once heard a “soft landing” for the US economy was akin to “landing a plane on a cloud made of economic uncertainties, where the only turbulence comes from the collective sighs of economists holding their breath.” It increasingly appears we may actually see the mystical “soft landing” next year. Time will tell if it’s actually in the tea leaves, of course.

Closing Thoughts

Debi and the entire staff wish to thank all of you for your kind words and encouragement during this difficult time. It means so much to us to read how Gary was able to inform, educate and stimulate your thinking through the years. We hope to continue in the path he set.

F&T will be taking some time off next week but will return on January 2, 2024. You will want to read Spencer Wright’s take on the Federal Reserve’s unwinding of its balance sheet. Not many are talking about it.

On behalf of Halbert Wealth Management, we wish you and yours a Merry Christmas, Happy Holidays and a Happy and Prosperous New Year!

All the best,

Henry

 

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