On June 12, 2024, the US Federal Reserve released the June 2024 Fed dot plot, which showed a projected 2.25-point interest rate cut by yearend 2026. This would reduce the fed funds target rate range from 5.25%-5.50% today to 3.00%-3.25%.
The 19 Federal Open Market Committee ("FOMC") participants also projected PCE inflation to be 2.6% at year-end 2024 and for 2024 US GDP to grow 2.1%.
Many investors (and the media) focus on how many rate cuts there will be in 2024, but that's not what's really important. We believe the longer-term course of interest rates should be of greater concern, as that will determine the degree investments in individual corporate bonds can outperform popular investments like the Vanguard VMFXX money market fund.
This fixed income blog post covers key takeaways from the June 2024 Fed dot plot and the corresponding Federal Reserve Summary of Economic Projections report (the "SEP"):
- The medians of the June 2024 Fed dot plot project the fed funds rate to fall 25 basis points in 2024, 100 basis points in 2025, and 100 basis points in 2026, for a total of 225 basis points (or 2.25 percentage points, as shown in Figure 1).
- Many high quality corporate bonds yield between 5-8%, which can be locked in for 5, 10, or 20+ years. Yields of large money market funds, such as Vanguard VMFXX, vary monthly and would fall as the fed funds rate declines.
- The June 2024 Fed dot plot projects similar aggregate interest rate cuts between now and 2026 as did the previous Fed dot plot; however, the timing of the rate cuts comes later.
- As of June 5, 2024, the Fed had reduced the size of its securities holdings ("the Fed balance sheet") by $1.7 trillion since reaching a peak of $9 trillion in April 2022.
- We encourage investors to consider the Fed dot plot in the context of the other economic projections contained in the SEP and summarized in Figure 2.
The June 2024 Fed Dot Plot
The Fed dot plot shows the projected yearend fed funds rate from each of the 19 FOMC members. Each dot represents the opinion of one FOMC member. For example, as shown in Figure 1, seven FOMC members are projecting a yearend 2024 fed funds rate of 5.00%-5.25%, and eight are projecting a range of 4.75% to 5.00%.
While the June 2024 Fed dot plot projects 225 basis points ("bps") of interest rate cuts through 2026 (similar to the March 2024 dot plot), the timing of the rate cuts is slightly different. In the June 2024 Fed dot plot, FOMC members are projecting 25, 100, and 100 basis points of rate cuts in 2024, 2025, and 2026, respectively. The March 2024 Fed dot plot projected 75 basis points of rate cuts each year from 2024-2026. We show the March 2024 Fed dot plot below in Figure 3.
Figure 1: June 2024 Fed Dot Plot
Source: June 12, 2024 FOMC Summary of Economic Projections and Bondsavvy calculations.
The FOMC Press Conference June 2024
After the FOMC released its 2:00pm Eastern Time statement to hold the fed funds target rate at 5.25-5.50%, Fed Chair Jerome Powell hosted a press conference at 2:30pm Eastern Time. Figure A shows key statements he made during the press conference, which included the FOMC's views on the labor market, inflation, and potential rate cuts.
Figure A: Key Statements from the FOMC Press Conference June 12, 2024
Image licensed from Getty Images.
One item that received less press coverage was the continued reduction in the Fed's balance sheet, or its "securities holdings." The Fed grew its balance sheet from approximately $4 trillion in February 2020 to $9 trillion in April 2022. On June 5, 2024, the Fed balance sheet had fallen $1.7 trillion to $7.3 trillion. The FOMC is planning further reductions per the June 2024 FOMC press conference.
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June 2024 Summary of Economic Projections
While the Fed dot plot often receives the most fanfare, it is driven by where FOMC members believe the economy is heading. In connection with this, in the June 2024 SEP, the FOMC updated its projections for key economic indicators, including unemployment, inflation, and GDP growth. Figure 2 provides a summary of the projections across recent Fed SEPs.
As shown, economic estimates were little changed between the March and June 2024 SEPs. That said, the June 2024 SEP reflected 20 basis points of higher projected yearend inflation in 2024 and 2025. This 'sticky' inflation has been a key factor in the Fed keeping rates "higher for longer."
Figure 2: Economic Projections of FOMC Participants
| Date of Projection | 2022 | 2023 | 2024 | 2025 | 2026 | Longer Run |
| Unemployment Rate | ||||||
| June 2024 | NA | NA | 4.0% | 4.2% | 4.1% | 4.2% |
| March 2024 | NA | NA | 4.0% | 4.1% | 4.0% | 4.1% |
| Dec 2023 | NA | 3.8% | 4.1% | 4.1% | 4.1% | 4.1% |
| Sept 2023 | NA | 3.8% | 4.1% | 4.1% | NA | 4.0% |
| June 2023 | NA | 4.1% | 4.5% | 4.5% | NA | 4.0% |
| Dec 2022 | NA | 4.6% | 4.6% | 4.5% | NA | 4.0% |
| Mar 2022 | 3.5% | 3.5% | 3.6% | NA | NA | 4.0% |
| PCE Inflation | ||||||
| June 2024 | NA | NA | 2.6% | 2.3% | 2.0% | 2.0% |
| March 2024 | NA | NA | 2.4% | 2.1% | 2.0% | 2.0% |
| Dec 2023 | NA | 2.8% | 2.4% | 2.1% | 2.0% | 2.0% |
| Sept 2023 | NA | 3.3% | 2.5% | 2.2% | NA | 2.0% |
| June 2023 | NA | 3.2% | 2.5% | 2.1% | NA | 2.0% |
| Dec 2022 | NA | 3.1% | 2.5% | 2.1% | NA | 2.0% |
| Mar 2022 | 4.3% | 2.7% | 2.3% | NA | NA | 2.0% |
| Change in Real GDP | ||||||
| June 2024 | NA | NA | 2.1% | 2.0% | 2.0% | 1.8% |
| March 2024 | NA | NA | 2.1% | 2.0% | 2.0% | 1.8% |
| Dec 2023 | NA | 2.6% | 1.4% | 1.8% | 1.9% | 1.8% |
| Sept 2023 | NA | 2.1% | 1.5% | 1.8% | NA | 1.8% |
| June 2023 | NA | 1.0% | 1.1% | 1.8% |
NA | 1.8% |
| Dec 2022 | NA | 0.5% | 1.6% | 1.8% | NA | 1.8% |
| Mar 2022 | 2.8% | 2.2% | 2.0% | NA | NA | 1.8% |
Source: FOMC Summary of Economic Projections Reports
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What the Fed Dot Plot Means for Investors
Given the stickiness of inflation and the Fed's commitment to reducing it to 2%, short-term interest rates are likely to remain near 5% through 2024. This should keep near-term money market fund returns elevated. The question investors must ask themselves, however, is how to position themselves beyond 2024.
As we discuss in our Eight Reasons Not To Own Vanguard VMFXX blog post, the VMFXX yield is highly correlated to the fed funds rate. As the fed funds rate falls, the VMFXX yield would fall as well. In addition, since money market funds such as Vanguard VMFXX cannot achieve capital appreciation, such investments would not benefit from an increase in bond prices associated with falling interest rates.
In our VMFXX yield blog post, we discuss how high quality US corporate bonds have advantages to Vanguard VMFXX, including higher potential returns, lower fees, and higher credit quality. Individual corporate bonds allow investors to lock in high yields for 5, 10, or 20+ years and to benefit from capital appreciation opportunities. Neither of these key investment objectives is possible with money market funds.
Many high quality corporate bonds have YTMs between 5% to 6%. Total return opportunities can be considerably higher, as we show in our corporate bond returns page.
Previous Fed Dot Plots
The March 2024 Fed Dot Plot
The 19 FOMC participants include seven members of the Federal Reserve Board of Governors and the presidents of the 12 Federal Reserve Banks. In the Fed dot plot, each dot represents a participant's "judgment of the midpoint for the federal funds rate." Note that, at each FOMC meeting, only 12 of the 19 participants have a vote on setting the fed funds target rate.
What Does the March 2024 Fed Dot Plot Say?
On March 20, 2024, the FOMC left the target fed funds rate unchanged at 5.25% to 5.50%. In Figure 3, we show the March 20, 2024 target fed funds rate in the black rectangle.
As we move toward the end of 2024, the belly of the dot plot is 4.50-4.75%, which would imply a 0.75 percentage-point (or 75 "basis-point" or "75 bps") cut between March 2024 and December 2024. Of course, this projection was held by only 9 of the 18 FOMC participants, and we do not know which of the 19 dots are voting members.
Figure 3: March 2024 Fed Dot Plot
Source: US Federal Reserve Summary of Economic Projections, March 20, 2024
