How to Read Federal Reserve Projections Like a Pro


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

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

The question now is when the rate cuts will begin and how quickly borrowing costs will decline. For clues, investors will look to the Federal Reserve's new forecasts. Here's how to read the numbers.

When the central bank publishes its Summary of Economic Projections Each quarter, Federal Reserve watchers focus obsessively on one part in particular: the so-called dot plot.

The dot plot will show the Fed authorities' estimates of interest rates at the end of the next few years and in the long term. The forecasts are represented by points arranged along a vertical scale: one point for each member of the Federal Open Market Committee.

Economists are watching closely how the range of 19 estimates is changing, because it can give a sense of where policy is headed. They focus most intensely on the middle point, currently the tenth. That middle or middle official is regularly cited as the clearest estimate of where the central bank sees its policy direction.

The Federal Reserve is trying to reduce inflation, and to do so, officials have been raising interest rates to slow spending, slow investment and business expansion, and cool the labor market. The central bank raised rates rapidly between March 2022 and July 2023.

But authorities have kept rates stable since their July increase. And while officials in September 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 in September, that would imply only a quarter-of-a-quarter rate cut. spot. If they lower that forecast to 4.8 percent, it would suggest they expect to lower rates twice.

An important trick for reading the dot plot? Pay attention to where the numbers fall relative to the median long-term projection. That figure is sometimes called the “natural” or “neutral” rate, and 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 territory that restrains the economy.

One of the biggest questions of this cycle of rate hikes has been whether the Federal Reserve can carry out its task of reducing inflation without causing a big jump in unemployment, what economists often call a “soft landing.”

Page two of the economic projections contains some clues about how Federal Reserve officials think about that question.

Federal Reserve officials previously projected that unemployment would rise to 3.8 percent by the end of this year and then rise to 4.1 percent in 2024 and 2025. In November, unemployment remained to 3.7 percent.

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

The road to higher unemployment is paved with slower growth. To slow the labor market, officials often think they need to cool the overall economy below its potential, forcing it to walk when it is able to function.

Growth has surprised the Federal Reserve all year and was especially strong in the third quarter. With this in mind, it will be worth watching whether authorities still expect it to remain modest in 2024: they had previously expected at a pace of just 1.5 percent by the end of next year, well below the long-term sustainable pace of 1.8 percent.

Federal Reserve officials are likely to predict that inflation will slow in the coming years, in part because they always do. By definition, the Summary Economic Projections include forecasts of what the economy will be like if policy is set appropriately, and appropriate policy means an interest rate level that pushes inflation back to the Federal Reserve's 2 percent target. time.

Still, it will be notable how quickly Federal Reserve officials believe they can guide inflation fully toward its target. In their latest forecast, officials did not expect to be back on target until 2026, but given recent progress, they may now be feeling more optimistic.

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