[News Terms] What Is the 'Dot Plot' That Will Hint at Next Year's Interest Rate Hikes?

Chart Summarizing FOMC Members' Interest Rate Projections
Future US Interest Rate Levels Forecasted, Investors Focused

[Image source=Yonhap News]

[Asia Economy Reporter Heo Midam] The U.S. Federal Reserve (Fed) took a so-called 'big step' by raising the benchmark interest rate by 0.5 percentage points on the 14th (local time). However, the market paid more attention to the 'Dot Plot' released by the Fed on the same day than to the widely anticipated big step.

The Dot Plot released by the Fed is a chart that aggregates the future interest rate outlooks of the Federal Open Market Committee (FOMC) members. The FOMC is the Fed's highest decision-making body that determines the direction of monetary policy, including the benchmark interest rate and the scale of asset purchases. After the regular meetings in March, June, September, and December, the FOMC revises and announces economic forecasts and simultaneously releases the Dot Plot containing interest rate projections.

The reason to focus on the Dot Plot is that it allows understanding of each member's individual forecast. While the 'benchmark interest rate' set by the FOMC is a single number agreed upon by the members and holds significant meaning, it has the drawback of not revealing the specific opinions of individual members. The Dot Plot addresses this drawback, enabling investors to predict the Fed's policy more intuitively.

Through the Dot Plot, investors forecast the future level of U.S. interest rates and use it as a basis for investment decisions. This time, the released Dot Plot drew more attention because it allows prediction of the final interest rate level for next year. Currently, the Fed is continuously raising rates to lower U.S. inflation, and the endpoint of this is called the 'terminal rate.'

The Dot Plot reveals the appropriate benchmark interest rate levels as perceived by the 19 FOMC participants. In this Dot Plot, 17 out of the 19 members forecast that next year's benchmark interest rate will be above 5%. Among the 19 members, 7 expect the rate to exceed 5.25% next year.

Viscosity chart from December 2022. Photo by the United States Federal Reserve Board (Fed).

On the same day, the Fed implemented the big step by raising the benchmark interest rate to 4.25?4.50%. According to the Dot Plot released that day, there is a possibility that the Fed will raise the benchmark interest rate by an additional 0.75 percentage points next year. Of course, the Fed's monetary policy does not necessarily follow the Dot Plot. It can change at any time depending on economic conditions such as inflation and employment.