I'm LongbridgeAI, I can summarize articles.Wall Street investors are scrutinizing the Federal Reserve's upcoming 'dot plot' to gauge future interest rate hikes amid inflation concerns. While the Fed is expected to raise rates, the key question is whether this signals a continued hiking cycle or a single adjustment. However, credibility of the dot plot is questioned by new Fed Chair Kevin Warsh, who has criticized the tool and abstained from previous forecasts, potentially diminishing its influence on market expectations.
By Jeffry Bartash
Fed chief Kevin Warsh is no fan of bank's economic-forecasting tool, but it might still offer some clues
Wall Street is looking for more insight into how much the Federal Reserve might raise interest rates.
If the Federal Reserve jacks up interest rates this week to try to tame inflation, investors hope to connect the dots to figure out how much more the central bank will raise borrowing costs.
The dots in the so-called dot plot, that is.
Every year since 2012, the Fed has regularly offered forecasts from 19 senior officials on the future path of interest rates, inflation, unemployment and economic growth. Each official is unnamed and represented by a dot on a chart.
The dot plot was originally designed to give a heads-up to the public about the Fed's intentions in order to avoid bouts of instability in the economy.
Wall Street widely assumes the Fed will raise interest rates at its meeting on Wednesday, but what investors really want to know is just how high rates will go.
Will the dots show another increase in rates before December? What about next year?
Seeking an answer, investors on Wednesday will turn to the dot plot to try to discern the Fed's forecast for its benchmark short-term interest rate. This rate is crucial because it influences borrowing costs of mortgages, credit cards, auto loans and other lending that undergirds the economy.
The last dot plot, from June (see below), indicated just one rate hike this year - and even that was a close call.
The dot plot also suggested that the Fed was likely to reverse course in 2027 and cut rates slightly.
Now Wall Street is rethinking what the Fed will do.
Investors will look to "the dot plot to tease out if this is a hike or a hiking cycle," said Paul Eitelman, global chief investment strategist at Russell Investments.
Some Wall Street economists predict a more aggressive dot plot that points to another rate hike before the year is over, with one or two more increases in 2027. Others think the increase will be one and done. The rest appear to expect an in-between approach.
If history is any guide, one rate move is usually followed by at least a few more. The Fed, for instance, cut interest rates three times in 2025 when the U.S. job market turned wobbly.
Perhaps a bigger question is this: Should Wall Street give any credence to the dot plot?
After all, Fed Chairman Kevin Warsh, who took over in May, has been one of the dot plot's most ardent critics since it was created in the wake of the 2008 global financial crisis. He declined to provide his own rate forecast for the dot plot published in June.
"For me, it's not helpful in the conduct of policy," Warsh said at the time.
He has hinted the dot plot could be toned down or eventually shelved, but it's unclear if he has enough support inside the Fed to take such a step.
Dots and doubts
Even if Warsh abstains again, the other 18 senior Fed members are all expected to submit their own dots.
These dots will provide a glimpse into what they think about the trajectory of interest rates and the U.S. economy more broadly.
These dot-plot predictions, in turn, can influence current or future changes in stock or bond prices, the sinews of financial markets.
The refusal of the Fed chairman to participate, however, raises questions about how much credence investors should give the dot plot going forward.
Even though it was well-intended, the dot plot has not proved to be very accurate. It's drawn plenty of flak over the years, and even previous Fed chiefs, including Warsh's predecessor, Jerome Powell, have told investors to take the chart with a grain of salt.
Critics contend the dot plot quickly becomes stale and sometimes pushes the Fed to take actions that newly emerging economic data suggest would be unwise.
Eugenio Aleman, chief economist at Raymond James, said investors would be better off not taking the dot plot all that seriously.
"Warsh doesn't believe in it," he said. "I think the dot plot is going to get less and less important."
Even if the new dot plot shows another rate hike in October or December, Warsh could downplay the forecast in his press conference after the Fed vote.
"We anticipate Chairman Warsh will try to maintain optionality and push back against the dotplot indicating another rate hike in 2026," EY Parthenon chief economist Gregory Daco wrote in an analysis.
The Fed rate forecast for 2027, meanwhile, is even hazier. More than a few prominent Wall Street firms say inflation is likely to slow next year, which would allow Warsh's Fed to cut interest rates.
Most investors are betting otherwise. They predict the Fed will raise rates at least once more - and that could be reflected in the dot plot.
"The new dot plot is also likely to suggest a higher probability of at least one hike next year," said Chris Low, chief economist at FHN Financial.
-Jeffry Bartash
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