- The Federal Reserve's dot plot reflects interest rate expectations from the world's most important central bank.
- June's Fed dot plot will likely show fewer rate cuts, given the strength of the economy and the persistence of inflation.
- Fed Chair Jerome Powell decision to focus on inflation or employment may add context to the dot plot.
A dovish decision – that was the verdict in March, when the Federal Reserve's (Fed) dot plot still pointed to three interest rate cuts in 2024, despite higher inflation. Markets seemed to ignore the fact there were fewer dots pointing to three cuts, and that the median was close to tipping down to two cuts.
Fed dot plot recent developments
The dot plot is officially called the Summary of Economic Projections (SEP) and consists of projections for growth, inflation and employment, in addition to rates. Markets care about borrowing costs – even to the point of cheering weak economic data as it implies lower rates.
After that March decision, the bank acknowledged inflation was higher and pointed to a longer delay in cutting rates. Some hawkish Fed members, such as Minneapolis Fed President Neel Kashkari, opened the door to refraining from reducing borrowing costs in 2024. That would mean higher points on the dot plot.
However, it was followed by a much-needed retreat in inflation in the report for April, which showed that the "bump on the road" might have been long but that price rises were moderating. It emboldened the doves, which could still opt for three rate cuts on the dot plot.
Underlying inflation is falling slowly:
Will the Federal Open Market Committee (FOMC) opt for one or two interest rate cuts as the median in the dot plot? That is the question for markets. Apart from inflation, the labor market is also of high importance as full employment is the Fed's second mandate.
Fed Chair Jerome Powell said that "unexpected weakness" in jobs would push the Fed toward cutting rates. The last Nonfarm Payrolls resulted in 272,000 new positions in May, well above expectations and reflecting strength rather than weakness.
However, the Unemployment Rate rose to the round 4% level. That strengthens the doves.
US Unemployment Rate. Source: FXStreet
Fed dot plot has the first and last word in moving markets
FOMC members – including those who do not vote on interest rates – participate in creating the dot plot, and the eyes of markets are on them. A median of one rate cut in 2024 would boost the US Dollar (USD), but send Gold price and stocks down. A dot plot pointing to two cuts would cheer investors in stocks and Gold, while downing the US Dollar.
It is essential to note that the accompanying statement and Fed Chair Jerome Powell's press conference also move markets. And Powell will stress that the FOMC makes decisions on a meeting-by-meeting basis and is data-dependent. Nevertheless, the dot plot has the first word in moving markets – and the last word.
The dots are what investors remember, and the next ones come only in September. That means Gold, the US Dollar and stocks will be impacted by this factor for many months.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended Content
Editors’ Picks
![EUR/USD stays below 1.1100, looks to post weekly losses](https://editorial.fxstreet.com/images/Markets/Currencies/Majors/EURUSD/european-euro-coin-on-top-of-american-dollar-bill-11292130_XtraSmall.jpg)
EUR/USD stays below 1.1100, looks to post weekly losses
EUR/USD continues to trade in a narrow range below 1.1100 and remains on track to end the week in negative territory. Earlier in the day, monthly PCE inflation data from the US came in line with the market expectation, failing to trigger a reaction.
![GBP/USD struggles to find a foothold, trades near 1.3150](https://editorial.fxstreet.com/images/Markets/Currencies/Majors/GBPUSD/iStock-157771037_XtraSmall.jpg)
GBP/USD struggles to find a foothold, trades near 1.3150
GBP/USD stays on the back foot and trades in negative territory at around 1.3150 on Friday. The US Dollar holds its ground following the July PCE inflation data and doesn't allow the pair to stage a rebound heading into the weekend.
![Gold retreats toward $2,500 ahead of the weekend](https://editorial.fxstreet.com/images/Markets/Commodities/Metals/Gold/gold-bars-50657756_XtraSmall.jpg)
Gold retreats toward $2,500 ahead of the weekend
Gold stays under modest bearish pressure and declines toward $2,500 in the American session on Friday. The 10-year US Treasury bond yield edges higher toward 3.9% after US PCE inflation data, causing XAU/USD to stretch lower.
![Week ahead – Investors brace for NFP amid Fed rate cut speculation](https://editorial.fxstreet.com/images/Macroeconomics/EconomicIndicator/Employment/NFP/america-back-to-work-gm178972493-25143312_XtraSmall.jpg)
Week ahead – Investors brace for NFP amid Fed rate cut speculation
Here comes another NFP week, with investors eagerly awaiting the results as they try to discern the size and pace of the Fed’s forthcoming rate cuts. The weaker than expected July numbers triggered market turbulence, instilling fears about a potential recession in the US.
![Easing Eurozone inflation to back an ECB rate cut in September](https://editorial.fxstreet.com/images/Macroeconomics/Countries/Europe/Eurozone_countries/Eurozone/eu-flags-flying-at-the-european-commission-building-brussels-belgium-24759579_XtraSmall.jpg)
Easing Eurozone inflation to back an ECB rate cut in September Premium
Eurostat will publish the preliminary estimate of the August Eurozone Harmonized Index of Consumer Prices on Friday, and the anticipated outcome will back up the case for another European Central Bank interest rate cut when policymakers meet in September.
![Moneta Markets review 2024: All you need to know](https://editorial.fxstreet.com/images/IT/Testing/Review/FXSBadgeCertifiedBackg_XtraSmall.png)
Moneta Markets review 2024: All you need to know
VERIFIED In this review, the FXStreet team provides an independent and thorough analysis based on direct testing and real experiences with Moneta Markets – an excellent broker for novice to intermediate forex traders who want to broaden their knowledge base.