Fed’s 3.8% Dot-Plot Median Was a Statistical Mirage, Not a Rate-Hike Consensus

Markets have increasingly priced in the possibility of a Federal Reserve rate hike this year after the central bank published a median year-end policy-rate forecast of 3.8%. But no member of the Federal Open Market Committee actually projected 3.8%.

Reuters reported on June 18 that the median year-end policy-rate forecast in the Fed’s Summary of Economic Projections, released on June 17, rose to 3.8% from 3.4% in March. Markets interpreted that as a signal of one rate hike this year. The yield on the two-year Treasury note jumped to 4.207%, while the dollar index climbed to 100.71, its highest level in about a year.

A closer look at the dot plot shows that not a single policymaker submitted a 3.8% forecast. The latest chart was based on 18 projections. Eight officials expected 3.625%, while three projected 3.875%.

Because the Fed averages the two middle values when the sample size is even, the calculation produced 3.75%, the midpoint between 3.625% and 3.875%. That figure was then rounded to 3.8% in the official release.

Under the Fed’s current rate framework, the available options are 3.625%, which implies no change, or 3.875%, which implies one increase. That means 3.75% does not exist as an actual policy path. Its use as the official median created a misleading impression in markets.

That alone does not make the Fed dovish. The dot plot showed nine officials expecting rate hikes, while nine others projected either no change or a cut. Among those forecasting hikes, six expected two or more increases rather than just one.

Tom Graff, chief investment officer at Facet, told Reuters that the dot plot marked a major shift even though the official policy rate was unchanged. Half of the committee projected higher rates, while only one official expected a cut.

The Fed’s economic projections also turned more hawkish. Its forecast for personal consumption expenditures inflation this year was raised to 3.6% from 2.7%, while the estimate for core PCE was lifted to 3.3% from 2.7%.

By contrast, the outlook for real gross domestic product growth this year was trimmed only slightly, to 2.2% from 2.4%. The unemployment-rate forecast was lowered to 4.3% from 4.4%.

Investors are focusing less on the median dot itself and more on the higher inflation forecasts and the increase in officials projecting rate hikes. In March, not a single policymaker expected a rate increase. This time, nine did.