How to Read the Fed’s Projections Like a Pro

Federal Reserve officials are scheduled to release both an interest-rate decision and a fresh set of economic projections on Wednesday, and Wall Street has been eagerly awaiting those revised estimates for clues on when interest rate cuts may begin.

Officials are expected to leave rates unchanged in a range of 5.25 to 5.5 percent, where they have been since July 2023. That is the highest rate setting in more than two decades. Central bankers came into the year expecting to cut rates several times by the end of 2024, but that outlook has shifted somewhat after inflation proved surprisingly stubborn at the start of the year.

The question now is when officials may begin to cut rates — and how much borrowing costs will actually move down. Investors will carefully parse the Fed’s fresh forecasts for hints. Here’s how to read the numbers.

When the central bank releases its Summary of Economic Projections each quarter, Fed watchers focus obsessively on one part in particular: the so-called dot plot.

The dot plot will show Fed policymakers’ estimates for interest rates at the end of the next several years and over the longer run. The forecasts are represented by dots arranged along a vertical scale — one dot for each of the central bank’s 19 officials.

Economists closely watch how the dots are shifting, because it can give a hint about where policy is heading. They fixate most intently on the middle dot, currently the 10th. That middle, or median, official is regularly quoted as the clearest estimate of where the central bank sees policy heading.

The Fed moved rates up quickly from March 2022 to July 2023 to make borrowing money more expensive, which can cool the economy. By taking steam out of the housing and labor markets, higher rates are expected to weaken demand and make it harder for companies to raise prices without losing customers, eventually weighing on inflation.

But policymakers do not want to slow the economy so much that they cause an outright recession. That is why they have been contemplating rate cuts: to avoid overdoing it. The European Central Bank and Bank of Canada have already begun to lower interest rates.

But Fed officials have actually been backing away from plans for imminent reductions. While their March projections estimated three rate cuts in 2024 — which would have left rates at 4.6 percent — that could change this time. They could project just two moves, many economists think.

One important trick for reading the dot plot? Pay attention to where the numbers fall in relation to the longer-run median projection. That number is sometimes called the “natural” or “neutral” rate. It represents the theoretical dividing line between monetary policy that is set to speed up the economy versus a policy meant to slow it down.

What the Fed is saying when rates are above that neutral rate is that they are in economy-restricting territory. But in March, that neutral level ticked up to 2.6 percent from 2.5 percent. If it moves higher again, it would suggest that today’s elevated interest rates are weighing on the economy just slightly less than officials have previously believed.

One of the biggest questions of this cycle of rate increases has been whether the Fed can succeed in lowering inflation without causing a big jump in joblessness — what economists often refer to as a “soft landing.”

Page two of the economic projections holds some hints about how Fed officials are thinking about that question.

Fed officials in March projected that unemployment would rise to 4 percent by the end of this year. As of last month, that had already happened. And with job openings coming down notably, some economists think that the jobless rate may rise more in coming months as would-be workers struggle to find available roles.

In fact, the Fed has suggested that an unexpected weakening in the job market could prod officials toward earlier rate cuts.

The road toward weaker inflation is also paved with slower growth. Fed policymakers have generally expected that the economy would gradually cool down amid higher interest rates, and that a weaker expansion would translate into less pricing power for companies.

That has been happening, but the process has not been as smooth as expected. Growth has bounced around — sometimes looking strong, then pulling back — as consumer spending has proved surprisingly resilient. Fed officials have already upgraded their growth forecasts pretty notably as a result.

If the Fed can pull off a situation in which growth holds up even as inflation slows, that would be good news for the economy, cushioning it against a more painful landing.

Fed officials are likely to predict that inflation will slow in the years to come, in part because they always do. By definition, the Summary of Economic Projections includes forecasts of what the economy will look like if policy is set appropriately — and appropriate policy means an interest rate level that drives inflation back to the Fed’s 2 percent goal over time.

Still, it will be notable just how quickly Fed officials think they can guide inflation fully back to the target. In their forecast in March, officials didn’t expect to get back to the target until 2026. That suggests officials are willing to bide their time, rather than trying to force price increases to decelerate more rapidly.

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