The Federal Reserve: FOMC Process, the Summary of Economic Projections and the Dot Plot versus Futures

What you will learn

• Who votes at the Federal Open Market Committee (FOMC) and when.
• What the Summary of Economic Projections (SEP) contains and how to read the dot plot.
• How a fed funds futures price converts into an expected rate.
• How to compare the dots with the futures path.

Explanation

Structure and the FOMC

The Federal Reserve System has three parts: the Board of Governors in Washington (seven governors with 14-year terms), twelve regional Federal Reserve Banks, and the FOMC, which sets the policy rate and balance-sheet policy.

The FOMC has twelve voting members: the seven governors, the New York Fed president (permanent, because New York executes the operations) and four of the other eleven regional presidents, rotating yearly. All nineteen attend and submit projections; only twelve vote. The FOMC meets eight times a year. The Board separately sets IORB and the discount rate, published in an "implementation note".

Regional presidents provide most dissents; a governor's dissent is rarer and carries more weight. Check whether a dissenter is a rotating president who leaves the voting group next January.

The Summary of Economic Projections

Four times a year (March, June, September, December) each participant projects GDP growth, unemployment, headline and core PCE inflation, and the "appropriate" federal funds rate at the end of the current year, the following years and in the longer run. The SEP reports the median, the central tendency (excluding the three highest and lowest) and the range.

The dot plot charts the individual rate projections, one dot per participant per horizon. Reading rules:

• Each dot is that person's view of the appropriate rate given his or her own forecast: not a plan, not a promise.
• The median is the headline, but the distribution matters: a tight cluster is a different message from a spread across 100 basis points.
• Count how many dots would need to move to shift the median; a median held by one dot is fragile.
• The longer-run dot is each participant's estimate of the neutral nominal rate; its drift signals views on r* (lesson 1).

Fed funds futures

A 30-day federal funds futures contract (CME) settles on the average effective federal funds rate during its calendar month. The price is quoted as 100 − expected average rate: 96.10 means an expected average EFFR of 3.90%. Because the contract averages the whole month, a mid-month meeting produces a blended number; traders back out the post-meeting rate from the days before and after the meeting (the CME FedWatch tool publishes the implied probabilities).

Three differences between dots and futures:

1. Dots are year-end points; futures give a monthly path.
2. Futures prices are probability-weighted averages across scenarios (including recessions with deep cuts) plus a small risk premium; dots are each participant's single most likely path.
3. The SEP can be stale within weeks; futures update every second.

A gap is normal: it shows whether the market believes the committee's path or expects events to overtake it.

Worked example

Hypothetical example: invented numbers.

After a September meeting the target range is 4.25–4.50%, midpoint 4.375%. The median year-end dot is 3.625%, 75 basis points below the midpoint (three 25-basis-point cuts at two remaining meetings). The December contract trades at 96.10.

1. Implied December rate: 100 − 96.10 = 3.90%.
2. Market-implied easing: 4.375% − 3.90% = 0.475 points = 47.5 basis points, or 1.9 cuts.
3. The dots imply 75 basis points; the gap of 27.5 basis points means the market prices about one cut less than the median.

Refinement for the mid-month meeting: suppose the December meeting is on the 10th and the market expects the rate to fall from 4.125% (after an assumed October cut) to 3.875% at that meeting. The December average would be (9 × 4.125% + 22 × 3.875%) ÷ 31 ≈ 3.95%, so a price of 96.05 would already represent a full December cut. Read the January contract (no meeting) for the rate expected after December. Exclusions: fees and the risk premium in futures prices; futures are leveraged and losses can exceed the margin posted.

Common mistake

Practice activity

On paper (hypothetical): the target range is 4.25–4.50%, the January fed funds futures contract trades at 96.35 and the median year-end dot is 3.875%. (a) What average rate does the contract imply? (b) How many basis points of cuts does the market price, and how many 25-basis-point cuts is that? (c) Compare with the dots and interpret the gap.

Key takeaways

• Twelve of nineteen FOMC participants vote; governors and New York are permanent, four regional presidents rotate.
• Read the dot plot for distribution, fragility of the median and the longer-run dot; it is not a promise.
• Futures price = 100 − expected average EFFR; use months without meetings to read the post-meeting rate.
• The gap between dots and futures is the market's disagreement with the committee in basis points: information, not an error.

Next step

Next we cross to the ECB: the Governing Council, fragmentation risk, the Transmission Protection Instrument and country spreads.