What Is a Dot Plot?
A dot plot, also known as a strip plot or dot chart, is a simple form of data visualization that consists of data points plotted as dots on a graph with an x- and y-axis. These types of charts are used to graphically depict certain data trends or groupings.
- A dot plot is a method of visually representing expectations for some data series.
- In finance, the Federal Reserve uses a dot plot to signal its expectations of future interest rate changes.
- In a Fed dot plot, each member of the FOMC is represented by a single dot, but each dot is anonymous.
Understanding Dot Plots
Dot plots are well known as the method that the U.S. Federal Reserve (Fed) uses to convey its benchmark Federal Funds interest rate outlook at certain Federal Open Market Committee (FOMC) meetings. FOMC members place dots on the dot plot denoting their projections for future interest rates in subsequent years and in the longer run.
Usually, the overall FOMC outlook for interest rates in any given year is reported as the median of the dots that show up on the dot plot. For example, on the chart above, the median for 2019 is around 2.9%, while the median for 2020 is around 3.1%. The Fed's dot plot projections are closely watched by investors and economists for indications of the future trajectory of interest rates. Each dot on the chart represents a member’s view of where the federal funds rate should be at the end of the various calendar years shown, as well as in the "longer run" (the peak for the federal funds rate after the Fed has finished tightening or “normalizing” policy from its current levels).
Here is an example of an FOMC dot plot released in December 2018:
On the x-axis, the current year, three years in the future, and the "Longer run" are labeled. On the y-axis are the expected Federal Funds interest rates. The dots represent each member's view of where interest rates should be at the end of each year.
Keep in mind, when you're looking at the chart, that each dot represents a member’s view of the range where rates should be at that time. Their dot is in the center of the range. In other words, the dots shouldn’t be taken to represent that a member is targeting that specific number. Importantly, it is not known which dot belongs to which FOMC member.
It’s also important to remember that the Fed is largely data-driven, and so it constantly adjusts its expectations based on economic trends and global events. In the event of major developments, such as a terrorist attack, a severe economic downturn, or a sharp jump in inflation, the most recent dot chart may no longer represent members' projections. As a result, the longer-term projections on the dot plot carry less weight than those that are closer to the present. Changes among Fed leadership—as terms expire, people resign, and others step up to fill the vacated positions—add to the potential for long-term policy shifts.