Fed's dot plot: Breaking down the latest projections

The Federal Reserve announced Wednesday that it would keep interest rates at a 22-year high for the third meeting in a row. Now that the Fed will not meet again until next year, many investors turn to updated forecasts in the Fed's Summary of Economic Projections (SEP), including its "dot plot" which maps out policymakers' expectations for where interest rates could be headed. Yahoo Finance Reporter Alexandra Canal joins the Live show to break down the latest dot plot update and how interest rates may play out for 2024.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

- Well, the Federal Reserve indeed holding rates steady as Wall Street expected. But the Fed also out with its summary of economic projections a.k.a. the SEP a.k.a. the dot plot. Here with the details, Yahoo Finance's Alexandra Canal. Hey, Allie.

ALEXANDRA CANAL: Hey, Julie. We love our dots here at Yahoo Finance. Like you said, this is part of the Fed's summary of economic projections. And it basically gives us a sense of what FOMC members expect when it comes to future economic indicators like GDP, unemployment, inflation, and of course, interest rates.

So let's start there. As you can see, each dot represents a specific FOMC member. By and large, the FOMC expects interest rates to tick down over time. You can see there's more dispersion the longer we go because it becomes more difficult to really predict things deeper into the future. But let's focus in on 2024 because we're finally going to be seeing some rate cuts and to quote the great Sheryl Crow, "the first cut is the deepest."

So the majority of FOMC members here expect interest rates to come down to 4.6%. Now, considering where we're at right now, that implies a 75-basis point cut. Since the Federal Reserve has been cutting rates by about a quarter of a percentage point at its meetings, this implies 3 rate cuts to come next year.

Now, five members here expect interest rates to decrease by more than 75 basis points. There are two that expect interest rates to remain unchanged. But zero expect any rate hikes to come next year. Now, let's dig into some of these other projections here. Let's start with inflation because this has been a big one for the Federal Reserve.

They want their target to be 2%. And it looks like we're going to get there by 2026. Inflation expected to peak at 2.4% in 2024 before gradually going down to 2.0% in 2026. Now, a big part of the inflation picture has been the tight labor market, the unemployment rate that has remained below 4%. But in 2024, the unemployment rate is expected to tick higher to 4.1% and remain at that level through 2026. This tight labor market has really been a struggle for the Federal Reserve.

So we'll see if that unemployment rate can indeed tick higher. And then finally, let's talk about growth. GDP has been surprisingly strong this year, despite all the rate hikes that we've seen. That's expected to decelerate, though, to 1.4% in 2024. This is significantly below the trend line. And then eventually, it will tick up to 1.8% in 2024 before hitting 1.9% in 2026, according to these projections.

Now, it could be possible that we could expect stronger growth to come this year, similar to what we saw this past year. However, Fed Chair Jerome Powell was asked specifically about this during the press conference. He said, strong growth on its own. It's not an issue, but that it could create more headaches for the Fed when it comes to reaching that 2% inflation target, and that it could take longer to reach that target, but that the Fed, quote, "will reach 2% inflation."

And that could potentially include some rate hikes if we see growth come in hotter than expected. But again, this is all a projection here. We can't fully predict the future. And clearly, from what we saw with the economy this past year, you never know what could come in 2024. Josh, Julie.

- Alexandra Canal, thank you so much, Allie.