Understanding SEP and Economic Projections

The Fed's dot plot moved markets by over $1 trillion in a single afternoon. In December 2023, the median dot shifted from projecting 50 bps of cuts in 2024 to 75 bps—and the S&P 500 surged 1.4% during the press conference (Bloomberg, 2023). Yet the actual 2024 cuts totaled 100 bps, differing from both projections. The practical point: the Summary of Economic Projections (SEP) is the most-watched Fed communication after the rate decision itself, but misreading it leads to expensive positioning errors.

What the SEP Includes

The SEP is released four times per year at the March, June, September, and December FOMC meetings—typically the meetings that include press conferences. It contains projections from all 19 FOMC participants (7 Board governors plus 12 regional bank presidents).

The five variables projected:

Each participant submits projections for the current year, the next two years, and the "longer run" (where they expect these variables to settle in the absence of shocks).

The point is: the SEP shows where individual policymakers think the economy is heading and what policy path they believe is appropriate. It's a window into FOMC thinking, not an official forecast.

Release Schedule: Four Times Per Year

The eight annual FOMC meetings alternate between SEP and non-SEP meetings. Markets pay particular attention to March and December SEPs because they span the full calendar year and capture updated longer-run estimates.

Why this matters: rate decisions at non-SEP meetings often draw on projections from the most recent SEP. If you want to understand the Fed's framework, focus on the four SEP releases.

Understanding Central Tendency, Range, and Median

The SEP reports three measures for each variable:

1. Median: The middle projection when all 19 are ranked from lowest to highest. For 19 participants, this is the 10th value.

2. Central Tendency: The range after removing the three highest and three lowest projections. This excludes outliers and captures the "middle 13" participants.

3. Range: The full span from lowest to highest projection among all 19 participants.

Example (hypothetical 2025 projections for 2026 Core PCE):

The median is the single number most cited in headlines. The central tendency shows the consensus band. The range reveals how much disagreement exists.

The durable lesson: wide ranges indicate genuine uncertainty among participants. When the range for the fed funds rate spans 150 bps or more, the Committee itself doesn't know where policy is headed—and neither should you.

Reading the Dot Plot

The dot plot shows individual projections for the appropriate year-end fed funds rate. Each dot represents one participant's view; dots are not identified by name.

Sample Dot Plot Format (19 dots per projection year):

How to interpret:

• The median for 2025 is 4.50-4.75% (10th dot from lowest)
• The median for 2026 is 4.25-4.50%
• The longer-run median is approximately 3.00% (the neutral rate estimate)

The practical point: count dots to find the median. The 10th dot (for 19 participants) is the median. Shifts in the median from one SEP to the next drive market reactions.

Longer-Run Projections: The Neutral Rate Concept

The "longer run" column in the dot plot represents each participant's estimate of the neutral fed funds rate—the rate consistent with stable inflation and full employment in the absence of shocks.

Current longer-run estimates (as of late 2024):

This neutral rate matters because:

1. It sets the baseline for "restrictive" vs. "accommodative"

If the current fed funds rate is 4.50% and the neutral estimate is 3.00%, policy is 150 bps restrictive. Markets watch for convergence.

2. It anchors long-term rate expectations

The 10-year Treasury yield tends to trade near the expected average fed funds rate over the next decade. If neutral is 3.00% and inflation expectations are 2.5%, a 10-year yield around 3.5-4.0% makes sense.

3. It signals the Fed's view of structural changes

The longer-run estimate drifted lower from approximately 4.25% in 2012 to 2.50% by 2019, reflecting lower productivity growth and demographics. It has since edged higher, suggesting some reversal of those forces.

The test: if you expect the neutral rate to be higher than the Fed's estimate, you should expect rates to remain elevated longer than the dot plot implies.

How to Interpret: Projections Are Not Forecasts or Commitments

The Fed explicitly states that SEP projections are:

1. Conditional on each participant's assumptions

Each participant projects what they believe will happen given their own assumptions about fiscal policy, productivity, global conditions, etc. These assumptions differ across participants.

2. Not commitments to future policy

The dots show what each participant thinks would be appropriate if the economy evolves as they expect. If the economy surprises, policy will differ.

3. Subject to substantial revision

The December 2021 SEP median for 2022 rate hikes was 75 bps. The actual outcome was 425 bps. Inflation surprised everyone.

Common misinterpretations to avoid:

The durable lesson: treat the SEP as the Committee's current assessment, not a promise. When incoming data diverges from projections, policy adjusts.

Sample SEP Table: December 2024 Format

Source: Hypothetical example based on typical SEP format

Tracking Changes Across SEP Releases

The market-moving information often comes from how the SEP changes relative to the previous release:

September 2024 to December 2024 comparison:

If the median fed funds path shifts higher while inflation projections rise, the message is clear: the Fed sees less room to cut than previously expected. This often pressures rate-sensitive assets.

Your SEP Monitoring Checklist

Before the release (preparation)

• Note the previous SEP medians for comparison
• Check market-implied rate path from fed funds futures
• Identify key questions: Will the dot plot show more or fewer cuts?

During the release (real-time)

• Find the new median dots for each year
• Compare to the previous SEP (did the path shift?)
• Note any widening of the range (increased disagreement)
• Check longer-run estimates for neutral rate shifts

After the release (integration)

• Listen to the Chair's press conference for interpretation
• Compare SEP path to market-implied path (who adjusts?)
• Update your own framework based on new information

Common Mistakes and How to Avoid Them

Mistake 1: Treating the median as a commitment

The median changes with every SEP. Basing investment decisions on the assumption that the Fed "will" cut 3 times ignores the conditional nature of projections.

Mistake 2: Ignoring the range

A wide range means participants disagree significantly. The median may not represent a true consensus—it's just the middle of a dispersed distribution.

Mistake 3: Over-focusing on year-end dots

The path matters, not just the destination. Two scenarios—gradual cuts vs. front-loaded cuts—have very different market implications even if year-end targets match.

Mistake 4: Confusing dot count with probability

If 10 dots are at 4.25% and 9 are at 4.50%, this doesn't mean "52% probability of 4.25%." It means opinions are split. The actual rate will be one or the other, not a weighted average.

Your Next Step

Download the most recent SEP from the Federal Reserve website (federalreserve.gov/monetarypolicy/fomccalendars.htm). Find the dot plot and count the dots to identify the median for the next two years. Compare this to the previous SEP release. This 15-minute exercise teaches you to read the primary source rather than relying on headlines that may emphasize different aspects.

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Related: Forward Guidance and Dot Plots | Measuring Market-Implied Policy Expectations | Federal Reserve Dual Mandate Explained