The Dot Plot Explained: Reading the Fed's Mind
Why the Summary of Economic Projections (SEP) moves markets more than the rate decision itself.
The Federal Reserve's "Dot Plot"—formally known as the Summary of Economic Projections (SEP)—is arguably the most scrutinized chart in global finance. It's released four times a year, typically in March, June, September, and December, coinciding with FOMC meetings that include a press conference. The Dot Plot maps out where each FOMC member expects interest rates to be at the end of the current year and for the next several years.
Why it matters more than the hike
While the immediate rate decision (e.g., a 25bps hike) is often priced in by the futures market weeks in advance, the Dot Plot provides the "forward guidance" that reprices the yield curve. A "hawkish surprise" in the dots—signaling rates will stay higher for longer—can send the US Dollar soaring even if the Fed pauses rates on the day.
Key Trading Insight
Don't just look at the median dot for the current year. Pay attention to the dispersion (disagreement) among members and the long-run neutral rate (r*). An upward shift in the long-run dot is a structural bullish signal for USD.
Deciphering the Projection Materials
Beyond the dots, the SEP includes forecasts for GDP, unemployment, and PCE inflation. A common setup for a reversal trade is when the Fed projects lower growth but higher inflation (stagflationary concerns), which complicates their policy path.
Institutional traders compare these projections against market pricing (OIS swaps). If the market expects 3 cuts next year but the Fed only projects 1, that divergence creates a volatility opportunity as one side eventually capitulates.