Of all the maddening things about this month’s Federal Open Market Committee meeting, perhaps the single most annoying is the hoopla surrounding the so-called dot plot. It even has its own Twitter hashtag: #Dotplot.
The dot plot is a chart that shows the expectations of each FOMC member — absent their names — for where they believe the central bank’s overnight lending rate will be in the future.
Here’s a recent example:
Source: Federal Reserve
That there were four members of the FOMC who thought at the end of 2014 that Fed rates would be at 2 percent by 2015 is, well, kind of adorable. Deeply misguided, totally wrong, but still cute in a wonky way.
The problem with this dot-plot chart is that it reflects a three-factor forecast:
— Each FOMC member’s expectations of the state of the economy in both the near and distant future.
— How each member believes they will vote on rates in light of that future economy.
— And what the consensus of the FOMC will be on rates in the future.