Beware of Dots

The Federal Reserve Dot Plot has a shaky ten-year history

  • The Dot Plot shows the Fed’s expectations of future interest rates
  • Since its inception in 2012 it has not proved very predictive
  • Rates have been a key driver of equity pricing over the last two years


My eighth-grade class celebrated our completion of middle school with a trip to Chicago.  We visited the Art Institute of Chicago, home to the world’s most famous example of the painting technique called pointillism. Seurat’s 1884 masterpiece, “A Sunday on La Grande Jatte,” is composed of thousands of small dots that produce the iconic image when viewed from a distance.  With my Kodak disposable camera, I mistakenly took a flash photo and was scolded by a gallery attendant.  For twenty years since, I have been haunted by dots.

A different type of dot has haunted me for the last decade, and these dots are produced by the Federal Reserve.  In 2012, interest rates had been at zero for three years following the financial crisis, and the Fed developed a new tool for forward guidance called the Dot Plot. This scatterplot registers a dot corresponding to each member’s* expectation of interest rates one, two, and three years in the future.  With rates at zero, Bernanke’s Fed used this tool to indicate continued accommodation.  This calmed markets until the Fed began tightening in 2016.  The thesis of “more communication is good” helped stabilize the recovery, which coincided with an 11-year bull market.

More communication has not been empirically proven to be better.  Market participants are ravenous for data, and when the Fed gives an inch, there is a chorus of prognosticators ready to turn it into a mile.  In 2012, a popular column would hand count the number of words with positive and negative connotations inside each Fed statement.  Today, as soon as the policy statement is released, it is parsed instantly by AI models and given a sentiment score.

These analyses would be incredibly useful if the Fed was good at predicting the future paths of interest rates, unemployment, and GDP.  Unfortunately, in our first decade with the Dot Plot, the three-year outlook on rates has missed by an average of 2%, sometimes 3% high, and, in late 2020, over 5% low.  It’s no surprise that the biggest misses came recently, accompanying the 4.25% rate increase in 2022.  Just like all prognosticators, the FOMC members have a bias toward the recent status quo.


So what can we conclude from the recent Fed meeting and associated Dot Plot that sent equity markets skyward?  My takeaway is that the Fed members believe rates have peaked and that cut(s) are likely next year if inflation continues to moderate.  But inflation has proved similar to a Kodak camera in an art museum; sometimes it flashes when we don’t expect it.


*Members of the Federal Open Market Committee (FOMC), which publishes the Fed’s Summary of Economic Projections



“Further Consolidated Appropriations Act, 2020 (2019 – H.R. 1865).” Congress.Gov, Accessed 21 Dec. 2023.

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