How Do Market Expectations React to the FOMC Dot Plot?

The public pays close attention to Federal Reserve communications about future monetary policy, but it remains an open question how those communications shape the public’s expectations for the path of policy rates. We explore how market expectations adjust to the information provided in the “dot plot” of the Summary of Economic Projections, which contains the Federal Open Market Committee’s assessment of the appropriate future path of the federal funds rate. The results shed light on the market interpretation of forward guidance and its efficacy as a communication tool. We find that financial markets respond to the Federal Reserve’s “dot plot” projections by adjusting their expectations for future interest rates, but only partially and gradually, reflecting the understanding that these projections are conditional forecasts rather than firm commitments. Over time, both market expectations and FOMC projections for interest rates tend to converge, showing that the dot plot is informative to market participants. This gradual adjustment highlights the dot plot’s role as a communication tool that shapes, but does not dictate, market expectations.