The Fed’s Magic 8 Ball

The Federal Reserve meets again this week, and Wall Street will study a scatterplot of dots, trying to divine where interest rates go next. There’s just one problem…

The man now running the Fed, Kevin Warsh, refuses to place his own dot on the plot.

And that tells you everything you need to know about the usefulness of the most famous chart in finance—the Fed’s dot-plot.

I don’t know how many of my fellow Americans know the dot-plot (which sounds a bit like, “Do you know the Muffin Man?”). Outside of Lower Manhattan and the confines of the economics world, the dot-plot is a fairly esoteric and arcane data point in the mosaic of econo-numbers that regularly gurgle forth.

To set you on the right path: Four times a year, Fed policymakers each drop a dot on a plot showing where they think interest rates are headed.

Markets cling to the median dot like a toddler clinging to Mommy’s leg in an unfamiliar setting.

Traders reposition literally billions of dollars around that little dot.

But here’s the dirty little secret Wall Street doesn’t talk about: as a forecasting tool, the dot plot is basically a mood ring. It tells you how committee members feel the day they colored in their own little dots.

Nothing more.

Because it turns out that the folks setting interest rates are pretty lousy at predicting where interest rates will be in the future.

One meeting out, the dots are basically fine—because at such close range, they’re not really a forecast so much as a statement of current intent when deciding on where to send interest rates at the next meeting.

But push past six to 12 months and the accuracy falls off a cliff like Wile E. Coyote.

Worse, the dot-plot is absolutely horrendous when it comes to turning points—the moments that actually matter to investors, when the rate path is about to unexpectedly bend in one direction or another.

Interest rates that actually manifest… they tend to overshoot dot-plot expectations in a rate-hike environment and drop faster than the dot-plot predicts when the cycle turns down.

Basically, the dots systematically lag reality in both directions.

Consider that in December 2021, the dots predicted that interest rates would sit below 1% by the end of 2022.

Rates instead rocketed to 4.5%.

Go back one more year and it’s the same story in reverse.

In December 2020, most Fed officials saw rates holding near zero all the way through the end of 2023.

And yet, the Fed started hiking in March 2022, long before the dot-plot suggested they’d raise.

Or December 2019: Fed honchos never penciled in the rock-bottom 0% to 0.25% range that 2020 actually delivered—because none of them imagined a pandemic.

Which is kinda the point: The dots are lousy at foreseeing the moments that actually set the rate path.

Even the Fed itself doesn’t defend the dot-plot as forecasts.

Members of the Fed, along with plenty of outside experts, have openly questioned the tool’s predictive power, and former Fed Chair Jerome Powell spent years telling everyone to take them with a grain of salt.

Which honestly raises the question: Why the hell produce them in the first place?

There’s even a Fed research paper explaining how the dots create an anchoring bias — meaning they slow down how fast the market incorporates new information, because everyone’s staring at last quarter’s dots instead of this quarter’s data.

So, it turns out that the crystal ball that Wall Street thinks the dot-plot represents is really nothing more than a Magic 8 Ball… with cloudy water.

Maybe that’s why new Fed Chair Kevin Warsh refuses to play the dot-plotting game—the first Fed chair to skip making a dot-plot projection since the plot was born in 2012.

His reasoning, translated into my own words: I’m not going to tell you where I think rates are going, because I don’t know—and neither does anyone else penciling in a dot.

So this week, when you see headlines breathlessly parsing every syllable of the Fed’s statement for the economy’s “path forward,” remember that what we really have is a room full of forecasters who’ve been wrong at every major turn, all reading a cloudy Magic 8 Ball.

Because the real driver of rates isn’t on the dot-plot.

It’s the collision between an inflationary era the Fed can’t fully tame, and an American debt crisis the Fed has no way to fight. But that’s a different dispatch… stay tuned.