Hawkish or Dovish? Inferring intended monetary policy from the Fed’s dot plot

We develop a forward-guidance Taylor rule with time-varying coefficients, estimated from the Federal Reserve’s Summary of Economic Projections (SEP) median forecasts of the federal funds rate, inflation, and unemployment between 2012 and 2025. Our model allows policy inertia, inflation responsiveness, and output sensitivity to evolve as stochastic processes, while accounting for the effective lower bound with a shadow-rate specification. The results show that the Fed’s intended policy after the pandemic became more persistent and markedly more responsive to inflation, particularly during the 2021–22 tightening cycle, while responsiveness to the output gap remained stable. Compared with constant-coefficient or non-inertial alternatives, our specification tracks SEP rate projections more accurately, especially at turning points, and the estimated coefficients help explain bond excess returns, indicating that markets interpret the evolving rule embedded in the dot plot. We conclude that the SEP functions as a dynamic communication device, signaling shifts in the Fed’s intended policy stance in real time.