Dot plot as signal: Waller on what the SEP says about hikes

The news

Federal Reserve Governor Christopher Waller used an October 8 speech at the Istanbul Economic Forum to explain what changed to bring the September rate increase, and to argue that the dot plot in the Summary of Economic Projections works as a signal of where policy is headed without being forward guidance. He said sixteen of the 18 participants who submitted dots anticipated at least one more hike during the two remaining meetings this year, and four of those expected two.

Key takeaways:

• The FOMC raised its policy rate 25 basis points to 3.75 to 4 percent in September, after nine months on hold.
• Eight participants expect rates at the end of 2027 to be 50 basis points higher than today, though Waller said reading the 2027 dots is complicated.
• Futures prices as of October 7, he said, show an 85 percent chance of at least one hike by December and nearly a 20 percent chance of two.
• By the March 2027 meeting, markets see nearly an 80 percent chance of at least two hikes and a 33 percent chance of three or more.

Our analysis

Waller started with a question: what changed between July 29, when the FOMC held, and September 16, when it raised? He traced the answer back further. Cuts of 75 basis points over three meetings in the second half of 2025 came with inflation fairly close to target after accounting for tariffs and with a weakening labor market, which he called insurance against a slowdown. In the first half of 2026 the labor market stabilized while progress on inflation stalled, partly because of the Middle East conflict and high energy prices. He supported holding in the spring and summer, hoping the conflict would end and oil prices would not have a lasting effect.

Three developments eroded that hope. Expectations for a quick end to the conflict faded, with experts warning that low inventories and damaged infrastructure could keep oil prices high through 2027. The AI buildout was driving up high-tech consumer prices, and projections for its size ballooned. And trade conflicts threatened new tariffs. When the first reading of August inflation came in hot just before the meeting, he said, the conclusion that inflation was not making enough progress was hard to avoid. He rejected the idea that policy turned on a single data point: it was a preponderance of evidence over several months.

The data since reinforce that view. Waller described a stable labor market, with the unemployment rate low and payroll gains in the range of breakeven estimates, and August core PCE inflation of 0.25 percent for the month and 3 percent over twelve months. Twelve-month core has stayed between roughly 2.5 and 3.0 percent since the spring of 2024. In his words, policy will focus on the inflation side of the mandate for at least the near term.

The second half addresses communication. Using an example of three 25 basis point hikes, he compared three approaches: saying nothing, which risks market surprises; strong forward guidance, which locks in a path regardless of data; and a signaling option, which tells markets roughly where policy is headed over an interval while leaving the pace and size data dependent. He placed the Committee’s public remarks and the quarterly projections in the third category. The dot plot, in his view, lets markets estimate the likely terminal rate without a fixed commitment.

He added that if data come in as expected he anticipates further hikes, though not necessarily at consecutive meetings, and that they should come within an acceptable period.

Room for disagreement

The line between signaling and guidance is subtle. Waller argues that signaling, say, 75 basis points of hikes over six months without fixing the pace is different from forward guidance. Critics might say a market pricing an 85 percent chance of a December hike treats the signal as a commitment. He also acknowledged that the dots are hard to read for 2027, since they may mix early hikes with later cuts.

His reading of the economy also has limits. He said he is not greatly concerned that tighter policy threatens a slowdown, but the September jobs report showed fewer jobs created in total, even if he described the labor market as solid and stable.

What to watch

• The two remaining FOMC meetings this year, which will show whether the Committee follows the signal that sixteen participants sent.
• The next inflation reports, since Waller said a timelier return to 2 percent is the goal behind further hikes.
• Energy prices and developments in the Middle East conflict, which he identified as a persistent source of inflation pressure.