Federal Reserve officials are scheduled to release a fresh set of economic projections alongside their rate decision on Wednesday, forecasts that will offer a fresh glimpse of just how much and how quickly central bankers expect interest rates to come down.
Central bankers raised interest rates sharply in 2022 and 2023 to slow the economy and wrestle rapid inflation under control. But price increases are nearly back to normal, so policymakers cut interest rates in both September and November — and are expected to make a third and final cut of 2024 on Wednesday.
The big question now is what will come next. When policymakers last released quarterly economic projections in September, they expected to make a full percentage point of rate cuts in 2025. But since then, growth has been stronger and inflation has been stickier than many officials had expected.
That could lead to some changes when the fresh projections are released this week. Here’s where to watch for changes — and how to interpret any updates.
The dot plot, decoded
When the central bank releases its Summary of Economic Projections each quarter, Fed watchers focus obsessively on one part in particular: the so-called dot plot.
The dot plot will show Fed policymakers’ estimates for interest rates at the end of the next several years and over the longer run. The forecasts are represented by dots arranged along a vertical scale — one dot for each of the central bank’s 19 officials.
Economists closely watch how the dots are shifting, because it can give a hint about where policy is heading. They fixate most intently on the middle dot, currently the 10th. That central, or median, official is regularly quoted as the clearest estimate of where the central bank sees policy heading.
The Fed moved rates up quickly from March 2022 to July 2023 to make borrowing money more expensive, which cools the economy. By taking steam out of the housing and labor markets, higher rates were meant to weaken demand and make it harder for companies to raise prices without losing customers, eventually weighing on inflation.
That seems to have happened. Thanks to a combination of healing supply chains and slowing demand, inflation has cooled substantially: It is now just a bit above the Fed’s 2 percent target.
Given that, officials began have been cutting interest rates since September. But the big question is how much they will lower them in the years ahead — and that is what the dot plot could answer, by showing where officials expect rates to end up in 2025 and 2026.
Put it in neutral.
One important trick for reading the dot plot? Pay attention to where the numbers fall in relation to the longer-run median projection. That number is sometimes called the “natural” or “neutral” rate. It represents the theoretical dividing line between monetary policy that is set to speed up the economy versus a policy meant to slow it down.
What the Fed is saying when rates are above that neutral rate is that they are in economy-restricting territory. The neutral estimate stood at 2.9 percent as of September, but it has been ticking up all year.
If it moves higher again, it would suggest that today’s elevated interest rates are weighing on the economy less than officials have previously believed.
Unemployment projections could be interesting
Back in September, the job market seemed to be slowing meaningfully and Fed officials expected the unemployment rate to close out the year at 4.4 percent. Instead, joblessness has stabilized. It seems poised to average 4.1 percent or 4.2 percent in the final quarter of 2024, barring a surprise this month.
That could mean that the Fed will need to update its projections for the next several years. And at the same time, consumers are spending more readily than just about anyone had expected — which could keep overall growth chugging along at a faster clip than previously forecast.
Is this the soft landing?
This all seems to be adding up to the soft landing that the Fed has been aiming at for so long. Officials once dreamed of cooling inflation and the economy down just enough to bring down inflation, without clamping down so much that they tipped the economy into a recession and caused unemployment to surge.
That is exactly what seems to be happening.
But even if the fresh economic projections seem to point to a gentle outcome — one in which America’s economy has settled into a steady glide path, the job market remains healthy, and inflation is nearly under control — gray clouds hang on the horizon.
It is unclear what White House economic policy will look like in 2025. That means these economic projections will be outdated almost as soon as they are made: If the incoming Trump administration institutes big tariffs, deports immigrants in mass, or cuts regulations in key industries, it could shake up America’s economic trajectory.
But what exactly will come to pass is anyone’s guess — and that means these projections, made before the policy outlook is uncertain, are even rougher than usual.
“I’m taking the Summary of Economic Projections very lightly,” said Thomas Simons, chief U.S. economist at the bank Jefferies.
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