In December, the Fed released a dot plot that showed 75 basis points is rate cuts in 2024. At the time, that seemed hawkish relative to the 150 bps the market was pricing in.

Now it's the opposite. Markets are priced for 69 bps and when you take out roughly 15 bps in tail risks, I'd say the market is around 55 bps. It's a strong signal that the Fed median dot will come down to 50 bps.

One thing to note is -- as Michael Brown highlights today -- the dot plot is far from predictive. At the start of 2022, the dots showed rates would be at 3.0% now.

Dot plot spaghetti

That will be something to keep in mind when the Fed decision is made. Just because the Fed is thinking 50 basis points, doesn't mean you have to as well. If you think economic data is going to turn down, it's reasonable to expect more cuts and vice versa.

Despite that, I think the first reaction in the market will be on whether the median dot is at 50 bps or 75 bps. But shortly after that, the reaction will depend on how all the dots look.

Dot plot

Critically, only two dots will need to move up from 75 bps to 50 bps to swing the median from the current 4.6% level to 4.8%, removing a cut.

I'd argue that two dots aren't enough for a signal. Instead, if there are 3-5 dots shifting higher, it's a much stronger signal, even though the change in the median is the same. I will be watching for that on Wednesday.

In addition, watch the evolution of the medians in future years which are currently at:

  • 2025: 3.6%
  • 2026: 2.9%
  • Longer run: 2.5%

You could make the argument that if the 2025 and 2026 dots don't move then the small shift from 75 to 50 is insignificant.

Moreover, I think all the dot plot trades could be rendered obsolete about an hour after the FOMC once Powell has a chance to weigh in during the press conference.