Where will the dots land?

Dot plot meme

There's a strong argument to be made that the market reaction to the FOMC decision today will be largely governed by the dot plot.

The Fed's Summary of Economic Projections is released quarterly and at the most recent release in June, the dollar surged after a surprise shift in the dots to show hikes in 2023, with a growing possibility of 2022.

Here were the key changes from the March dots:

  • 13 Fed members showed hikes in 2023, from 7 in March
  • 7 of the 18 members showed a 2022 hike from 4 in March

Just two more dots need to shift at this meeting to make it an even split between 2023 and 2022. If three shift it will force market participants to price in a hike late in 2022 with a steeper path afterwards.

June dots:

June dots

March dots:

March dots

As for 2023, the number of dots showing hikes and how many will also be key. The median right now is for two hikes by the end of 2023 but there's a wide dispersion with two dots showing rates between 1.50-1.75% and five dots still at the zero bound. The market will be trying to get a sense of both the appetite for hiking and how quick those hikes are likely to be.

Finally, this is our first look at the 2024 dots. Forecasting that far out is a difficult job but it will offer more clues on how quickly Fed members envision raising rats after liftoff. That's a critical variable because terminal rates are a key input for long-term borrowing markets.

An important caveat to remember in all of this is that the dots aren't meant to be strong forward guidance. They're forecasts that are easily changed and they don't show who each dot belongs to. At the end of the day, the core of the Fed and not the regional presidents are what matters.

"The dots are not a great forecaster of future rate moves. And that's not because-it's just because it's so highly uncertain. There is no great forecaster of the future-so dots to be taken with a big, big grain of salt," Powell said in June.

But with little commitment on a taper likely to emerge, the dot plot will be what moves the market initially.