US & World Economies US Economy What Is the U.S. Federal Reserve Dot Plot? The Fed Dot Plot Explained in Less Than 5 Minutes By Thomas Kenny Thomas Kenny Thomas Kenny is an expert on investing, including bonds, ETFs, and mutual funds. He has more than 25 years of experience in the finance industry and is a partner and co-founder at Boston Investor Communications Group, a communications company for mutual fund and other investment industry providers. learn about our editorial policies Updated on March 4, 2021 Reviewed by Robert C. Kelly Reviewed by Robert C. Kelly Robert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive. He is a professor of economics and has raised more than $4.5 billion in investment capital. learn about our financial review board In This Article View All In This Article What Is the Fed Dot Plot? How the Fed Dot Plot Works What the Fed Dot Plot Isn’t Photo: Drew Angerer / Staff / Getty Images Definition The U.S. Federal Reserve dot plot is a chart summarizing the Federal Open Market Committee's (FOMC) outlook for the federal funds rate. Each dot represents the interest rate forecasted by one of the 12 members of the committee. Definition and Example of the Federal Reserve Dot Plot The Federal Reserve originally introduced its dot plot in 2012, amid the country's economic recovery from the 2008 financial crisis. It represents the Fed’s ongoing effort to become more transparent about its policies. The dot plot is published quarterly as a chart showing where each of the 12 members of the FOMC, the rate-setting body within the Fed, expect the federal funds rate to be for each of the next three years and the long term. The Fed is not bound by these predictions, and they change regularly. Note The federal funds rate is the rate that banks charge each other for lending money. It is the base interest rate for many short-term transactions in the U.S. economy. How the Fed Dot Plot Works The committee is made of up of the seven members of the Fed's bBoard of Governors, and the president of the Federal Reserve Bank of New York. The remaining four seats are filled on a rotating basis by presidents from the remaining 11 Fed banks. These presidents serve one-year terms. One is chosen from each of the following regional groupings of Fed banks: Boston, Philadelphia, and RichmondChicago and ClevelandDallas, St. Louis, and AtlantaSan Francisco, Kansas City, and Minneapolis Each dot on the chart represents a member’s view of where the federal funds rate should be at the end of the various calendar years shown, as well as in the longer run. This long-range view represents the peak for the federal funds rate after the Fed has finished tightening or “normalizing” policy from its current levels. The official rate forecast is set based on the median of all dots. More important than the absolute number for the projections is the direction of movement. Investors want to know whether the FOMC is leaning toward looser monetary policy (reducing rates) or tighter policy (raising rates). For example, a shift toward higher rates in the dot plot in March 2014 led to a short-term sell-off in both stocks and bonds, a reflection of investors’ fear that the Fed might raise rates sooner than expected. Note While only 12 members serve on the FOMC at a time, the dot plot includes opinions (dots on the chart) from each Fed bank president, for a total of up to 19 dots. Their opinions matter because dot plots include long-term predictions, and four of the FOMC's 12 seats are rotated annually. What the Fed Dot Plot Isn’t Keep in mind, when you're looking at the chart, that each dot represents a member’s view of the range of where rates should be at that time. Their dot is in the center of the range. In other words, the dots shouldn’t be taken to represent that a member is targeting that specific number. It’s also important to remember that the Fed remains data-dependent, and it adjusts its policy based on economic trends, inflation, and global events. In the event of major developments, such as a terrorist attack, a severe economic downturn, or a sharp jump in inflation, the most recent dot chart may no longer represent member projections. As a result, the longer-term projections on the dot plot carry less weight than those that are closer to the present. Changes among Fed leadership—as terms expire, people resign, and others step up to fill the vacated positions—add to the potential for long-term policy shifts. Furthermore, there's no way to tell which dot belongs to which member, so investors don’t have a sense of how much weight to attach to any outlier dots. There's no way to tell which dot belongs to 2019 Fed Chair Jerome Powell and which belongs to a Fed bank president who isn't currently a member of the FOMC. Naturally, this won’t stop market participants from reading a great deal into the specific averages that are generated by each new iteration of the Fed dot plot. Bond investors should expect that this release will be a new source of market volatility after each Fed meeting. However, former Fed Chair Janet Yellen warned that people “should not look at the dot plot as the primary way in which the Committee is speaking to the public at large.” Key Takeaways The Federal Reserve's dot plot is a quarterly chart summarizing the outlook for the federal funds rate for each of the FOMC's members.The median of all the dots represents the forecasted rate for each of the next three years, as well as the long term.The forecasts can change significantly each quarter based on economic shifts, major events, or changes in FOMC membership.The shorter-term forecasts have more value for investors, but you should be careful not to rely only on the Fed dot plot for your investing decisions. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. The Federal Reserve Bank of New York. "Federal Open Market Committee."