In September, the Federal Reserve made its first interest rate cut in four years. It was bigger than expected–– half a percentage point. After their next policy meeting on November 7th, the Fed will announce if they will make another cut, and if so, by how much. Economists are busy making their predictions as to what they will decide, and one way they form their opinion is by tracking the dot plot released by the Fed every quarter.
Hoping to buy a new home or refinance? The Fed's decision will likely impact the cost of your mortgage. If you want to better understand how the Fed's interest rate decisions affect the housing industry, a good place to start is learning how to read the dot plot.
Understanding the Dot Plot
Every quarter, the Fed releases its Summary of Economic Projections, which includes the dot plot. This graph shows where Fed officials expect interest rates to be at the end of the upcoming years.
Nineteen dots arranged along a vertical scale represent the opinion of each of the Fed’s nineteen officials. They all make five predictions: one for the next four years, plus a prediction for the overall "longer run." The dots are kept anonymous, though some officials will publicly discuss their predictions.
Economists pay special attention to the tenth dot from each cluster. This is the median prediction, which tends to give the clearest idea of where policy is probably heading. To make their predictions, the pros compare how the dots have shifted from quarter to quarter. This gives them a little insight into how the policymakers reacted to the new economic data that’s rolled in since the last report.
When making their predictions, some pieces of data they consider are unemployment rates and inflation expectations.
Unemployment and Inflation
The Fed is cautiously moving towards rate cuts, given recent trends in inflation and the job market. Policymakers are wary of slowing the economy too much, which could lead to recession. In June, unemployment was projected to rise to 4% by the end of this year, and as of September, it already sat at 4.2%. If the Fed opts for aggressive rate cuts, it could signal concerns over economic stability.
Forecasting inflation is another critical aspect of the Fed’s projections. In June, the Fed anticipated inflation to be around 2.6% by year-end but has already dropped to 2.5%. The Fed's goal is to guide inflation back to their target of 2% over time.
Understanding Economic Trends: Guide your Real Estate and MortGage Decisions
As you monitor the Fed’s upcoming interest rate decisions and projections, pay close attention to the dot plot, unemployment forecasts, and inflation estimates. These indicators not only inform you about current lending costs but also provide a roadmap for the economic landscape ahead, guiding your mortgage decisions and strategies effectively.
Looking to buy a new home? Email Ben Nicolas or call (310) 874-1278 to learn how the upcoming Fed policy announcement might affect you.
Posted by Ben Nicolas on
Leave A Comment