What are the Fed’s “Dots” and why are they inaccurate and unreliable??
The formal name for the Projection Materials is the Summary of Economic Projections or SEP. The SEP projections are known to the financial media and everyday observers as the “dots” because they are presented as dots on a graph measuring time and value.
The dots are a set of projections of interest rates, unemployment, GDP growth, and unemployment rates offered by the members of the Board of Governors of the Federal Reserve and the presidents of the regional Federal Reserve Banks. Nineteen of those participants offered projections at this meeting.
The dots are widely regarded as a joke inside the Federal Reserve and the Fed wishes they had never started the dot process. But they don’t see a good way out of it. They are no better than guesses and have a dismal record when it comes to accuracy and reliability.
But, we have to pay attention to the dots simply because others do. Wall Street firms quickly scan the dots into their computers to calculate central tendencies of the various guesses. Business TV anchors breathlessly recite the dot averages on their broadcasts. Stock markets make material moves based on the comparison of the current dots to the last previous ones. Dots move markets even they poor.
The “Dots” show that the Fed officials expect the Fed funds rate to peak between 5.0% and 5.5% in 2023. The rate today is 4.5%. Using 5.25% as the median of the Fed’s projections, this implies interest rates will rise another 0.75% from current levels.
Sven Franssen