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INVESTMENT FUNDAMENTALS Fed talk: Explaining the dot plot. ©2024 SEI® 1 The Federal Reserve's "dot plot" is a chart that projects the future level of the federal-funds rate. Investors look to the chart for an idea of where interest rates will be in the coming years. Since interest rates influence economic conditions, investors use the dot plot to glean the Fed's opinions on where the economy will be over the next few years. What is the federal-funds rate? The federal-funds rate is the Federal Reserve's (Fed) policy rate. A policy rate is a short-term interest rate set by a central bank, such as the Fed. Specifically, the federal-funds rate is the rate of interest commercial banks charge each other for overnight loans. Yet, it has further-reaching implications, as it influences the level of other interest rates, such as the rates that banks offer consumers for loans. This dynamic, where the federal-funds rate determines other interest rates, makes it a benchmark interest rate. According to the Fed, the federal-funds rate "indirectly influences longer-term interest rates such as mortgages, loans, and savings, all of which are very important to consumer wealth and confidence." 1 These wide-ranging effects make the federal-funds rate a key policy tool for the Fed. Depending on their goals, a central bank can increase or decrease the policy rate to restrict or ease conditions, respectively. For example, if the Fed wants an environment of "easy money", where it costs less to borrow, it can accomplish this by lowering the policy rate, in this case the federal-funds rate. Who sets the rate? Within the Federal Reserve, the Federal Open Market Committee (FOMC) is responsible for setting the federal-funds rate. The FOMC meets eight times a year to evaluate economic conditions and determine if there needs to be an adjustment to the federal-funds rate or other changes to near-term monetary policy. The FOMC consists of 12 voting members: seven members of the Fed's Board of Governors; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents of the Fed, who each serve one-year terms on a rotating basis. In addition to the 12 voting FOMC committee members, the seven nonvoting Reserve Bank presidents also present their forecasts for where the policy rate will be in the future on the "FOMC participants' assessments of appropriate monetary policy" chart. They record these projections as individual points, or dots, on the chart—hence the commonly used nickname, the "Fed's dot plot". In other words, both voting and nonvoting Fed officials—the seven members of the Board of Governors and presidents of the 12 regional banks—provide their input on the Fed dot plot, typically resulting in 19 total dots per entry— one for each participant. 1 Board of Governors of the Federal Reserve System (US), Federal Funds Effective Rate [DFF], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DFF, March 6, 2024.