Federal Reserve officials are scheduled to release a fresh set of economic projections alongside their interest rate decision on Wednesday. Those forecasts will offer a glimpse of the path for monetary policy at a highly uncertain moment for the central bank.
Policymakers are preparing to cut interest rates for a third time this year in what is expected to be a uniquely contentious vote given divisions that have emerged inside the Fed. But what happens after that point is far less clear.
When the Fed last released quarterly economic projections in September, most officials penciled in one quarter-point cut in 2026, which would bring interest rates down to a range of 3.25 percent to 3.5 percent. They also raised their forecasts for inflation and growth in 2026, while trimming those for unemployment as officials factored in the economic effects of President Trump’s sweeping tariffs, immigration restrictions and other policy changes.
Policymakers have struggled to get a clear read of the economy in the three months since September’s forecasts were published, however, limiting the scope and scale of the changes likely to come on Wednesday. What officials sense is that the labor market has continued to soften while inflation has edged higher, although far less than what was expected earlier this year. That may mean that the bar for additional cuts next year is relatively high unless the unemployment rate starts to increase.
Here’s what could change in the forecasts on Wednesday and how to interpret those updates.
The dot plot, decoded.
When the central bank releases its Summary of Economic Projections each quarter, Fed watchers focus on one part in particular: the dot plot.
The dot plot will show Fed policymakers’ estimates for interest rates through 2028 and beyond. The forecasts are represented by dots arranged along a vertical scale — one dot for each of the central bank’s 19 officials. While only 12 get to cast a vote at each meeting, all 19 submit forecasts for interest rates and the economic outlook over the short and long terms.
Economists closely watch how the dots shift, because that can give a hint about where policy is heading. They fixate most intently on the middle, or median, dot. That is regularly cited as the clearest estimate of where the central bank sees interest rates going over a given period.
The forecasts should be viewed cautiously. The dot plot does not represent a preset plan for policy, but rather a compilation of individual officials’ projections at a moment in time. It can occasionally be a helpful communications device, giving Jerome H. Powell, the Fed chair, yet another tool to shape expectations about the policy path going forward. But when the economic outlook is highly uncertain, it can muddy the Fed’s message.
The central bank is trying to achieve two goals when it sets policy: low, stable inflation and a healthy labor market.
When it perceives elevated inflation to be a concern, it raises interest rates to make borrowing money more expensive, which cools the economy. In March 2022, the Fed began sharply raising interest rates in a bid to weaken demand and cool off a red-hot labor market. Eventually it became harder for companies to raise prices without losing customers, which in time helped to tame inflation.
As price gains cooled and hiring slowed, officials began cutting rates in September 2024. They kicked off with a half-percentage-point reduction, larger than the typical quarter-point cut. Mr. Powell described the move as one that would help to safeguard a strong economy, rather than a panicked response to unexpected weakness. The Fed lowered interest rates twice more in 2024, bringing borrowing costs down to 4.25 to 4.5 percent.
The Fed again cut interest rates in September and October. With December’s expected move, interest rates will shift down to a new range of 3.5 percent to 3.75 percent.
The first pressing question is just how many “soft dissents” there are this year. That entails officials writing down a forecast for interest rates to have stayed at the previous level of 3.75 percent to 4 percent, and represents one avenue for policymakers to indicate their disagreement with a cut beyond officially opposing the vote. Economists at Goldman Sachs expect five officials to register soft dissents.
The second pressing question is if there will be any changes to the 2026 outlook. Most economists expect the previous forecast of one quarter-point reduction to hold, in part because the central bank has had limited data to turn to in recent months because of the shutdown.
How restrictive are interest rates?
When you read the dot plot, it’s important to pay attention to where interest rate estimates 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 and a policy meant to slow it down.
The neutral estimate has steadily ticked higher in the past year, and in September stood at 3 percent.
Mr. Powell and other officials have continued to suggest that interest rates at current levels are “modestly restrictive,” suggesting that the Fed sees its policy settings as continuing to weigh on the economy and helping to bring down inflation, but not significantly so. Economists will be watching how the chair changes his tune on that point after Wednesday’s meeting.
They will also look to see if officials again raise their forecasts for the neutral rate, perhaps to just above 3 percent. That may reflect the fact that, so far, the economy has held up relatively well despite a long period of elevated interest rates, changing conceptions of the level of borrowing costs that neither revs up growth nor slows it down.
If it has indeed risen, that will limit how much more the Fed can lower interest rates going forward barring a sharp slowdown in the labor market.
Stagflationary shock ahead?
In recent months, Mr. Powell has emphasized what a challenging spot the Fed is in now that its goals of low, stable inflation and a healthy labor market appear to be in tension.
As he bluntly put it at one point, “there are no risk-free paths now.”
Wednesday’s economic forecasts are likely to reflect the conundrum the Fed now finds itself in.
In September, policymakers foresaw the economy growing 1.6 percent this year as core inflation, which strips out volatile food and energy prices, rose to 3.1 percent. They also expected the unemployment rate to rise to 4.5 percent. By the end of next year, they penciled in slightly better growth, marginally lower unemployment and lower inflation, although they did not forecast it getting back down to their 2 percent target until 2028.
The Fed will not have a comprehensive update on the labor market or inflation until the week after Wednesday’s policy decision, preventing major shifts in how policymakers view the outlook.
Colby Smith covers the Federal Reserve and the U.S. economy for The Times.
The post How to Read the Fed’s Projections Like a Pro appeared first on New York Times.
