Pie Chart: The Fed's Secret Weapon for Economic Forecasts

If you are an investor or trader, you are probably losing out on Fed’s mysteries. What does the committee do? How does it make decisions about interest rates? The answer often appears in a single strange chart – a scatter plot. This simple but very powerful tool tells us what Fed members think about the future. So what is this implied dot? How do we read it? And why do we have FOMO when it gets published?

The main method of data visualization: the scatter plot

A scatter plot is basically very simple. Imagine a straight line, where each dot is at a different level. Each dot represents one data point or opinion. The more dots cluster in one place, the more common that particular value is. In complex situations with thousands of data points, a scatter plot becomes your best friend. It can show patterns, clusters, and outliers in seconds, which would be very difficult in tables.

On the other hand, there are some challenges. If your data is very simple, a scatter plot might be overkill. And if you have a large amount of data, the chart can become blurry, doing the opposite of what you want – instead of clarifying, it becomes more ambiguous.

Two main models of scatter plots

There are two main styles of scatter plots in the world, each with its own purpose.

The first is the cliffhanger scatter plot. Think of it as a horizontal line, where each category gets its own row, and the value is indicated by a dot. This is good if you want to compare different options – for example, which country’s GDP is higher or what are the sales of different companies.

The second is the Wilkinson scatter plot. It resembles a histogram but different. In fact, each individual data point is a dot, stacked vertically. Here you see each case separately, and if many data points are in one column, you see all of them. This is especially useful when observation matters, but the frequency of outliers does not.

Fed’s scatter plot: what does the market expect?

Now, the part that excites the financial world. The U.S. Federal Reserve, specifically its Federal Open Market Committee (FOMC), uses a unique version of the scatter plot. This is what makes it special.

Each FOMC member meets about four times a year. What do they do? Each member, whether chair or vice-chair, assesses what the interest rate should be. This isn’t just spoken aloud. In reality, they express their forecasts on the chart – each dot represents one FOMC member’s opinion.

The chart shows what levels Fed members are thinking about, not only for the near future but also for one or two years ahead. This is important because the economy reacts to short-term decisions but also long-term trends. When interest rates go up, it affects everything – capital costs, government bonds, and cryptocurrencies. When rates go down, it often supports various assets, including digital currencies.

In September 2024, the Fed released a scatter plot showing FOMC members’ views on monetary policy. What does the chart actually do? The observed dots show what range the market expects.

What does the scatter plot tell us about real-time decisions?

Where are most of the dots? When the majority of FOMC members (the median) are around a specific rate, that’s what we see. It’s the best indicator of what the Fed is thinking about heading toward.

If many dots are spread higher or lower, it indicates a division. Some think rates should be higher (more hawkish), others think they should be lower (more dovish). It tells us a lot about policy direction. If the dots are clustered tightly, there’s consensus; if spread out, there’s uncertainty.

This helps shape market expectations. Investors, traders, and institutions pay close attention to these figures. Crypto followers especially watch the Fed’s scatter plot because low interest rates directly support risky assets, including Bitcoin and Ethereum.

Avoiding mistakes: limitations of the scatter plot

It’s important to remember that a scatter plot is not a crystal ball. It’s a critical snapshot, but forecasts often change.

FOMC members can revise their statements. Economic conditions can shift unexpectedly. Inflation might turn out higher than expected. Employment figures can fall. All these are within the Fed’s scope. Often, after the scatter plot is released, the Fed changes its stance in the following weeks or even days. The chart then becomes just history.

But that doesn’t mean it’s useless. The scatter plot still gives us an alphabet of what the Fed is thinking. If you interpret the dispersion correctly, it provides insight into the Fed’s outlook. A few weeks later, the forecast might shift, but the initial projection offers a valuable perspective. It helps us position ourselves better in our professional decisions.

Conclusion: understand the power of the scatter plot

A scatter plot is a simple tool, but very effective. It can handle large amounts of data, revealing complex patterns more clearly. The Fed’s scatter plot is a method that captures the financial world’s expectations.

It’s especially important when interest rates are rising and the economy is experiencing turbulence. Investors, traders, and policymakers see the Fed’s stance in this chart. Only the scatter plot is needed to prepare for what’s next, but it remains a powerful instrument.

So, next time the Fed’s scatter plot is published, you’ll already know what to look for. The placement of dots, the median position, and how they cluster around the median. This will help you forecast one or two years ahead – or at least understand what the Fed is doing next.