Why the front end stopped believing the dots
Two-year yields are pricing a faster cutting path than the median FOMC projection. We reconcile the gap, walk through the arithmetic, and find that the market — not the committee — has the better forecasting record.
The Federal Reserve publishes a dot plot four times a year — a scatter of where each policymaker expects the funds rate to sit at year-end. It is the closest thing the market has to the committee's collective forecast. And for most of the past two years, the front end of the Treasury curve has quietly disagreed with it.
As of last week, the two-year note yields 4.71%. Back out the roll and the term premium, and the market is discounting roughly 110 basis points of cuts over the next twelve months. The median dot implies 75. That 35bps wedge is not noise; it has persisted across three consecutive projection rounds.
Who has been right?
The uncomfortable answer for the committee is: not the committee. We scored twelve years of year-ahead dot medians against realized policy and against the forward curve on the same date. The forwards were closer in nine of those twelve years, and by a wider margin during turning points — precisely when the forecast matters.
The scorecard
The table below isolates the four most recent projection rounds. A negative error means the forecaster was too high — it expected more restraint than materialized.
| Round | Dot median | Forward | Dot error |
|---|---|---|---|
| Sep 2025 | 4.10% | 3.85% | −0.34% |
| Dec 2025 | 3.90% | 3.70% | −0.28% |
| Mar 2026 | 3.75% | 3.60% | +0.05% |
| Jun 2026 | 3.60% | 3.55% | 0.00% |
Tbl. 1 — Illustrative figures for demonstration. Errors in red denote an over-restrictive forecast.
The market does not forecast better because it is smarter. It forecasts better because it is forced to put a price on being wrong.
What it means for a portfolio
If the forwards are the better estimate, the front end is not obviously cheap here — most of the cutting is already in the price. The clearer trade is in the belly of the curve, where a steepening bias pays you to wait. We size that view small: being early is indistinguishable from being wrong until it isn't.
None of this is a prediction that the committee will capitulate on schedule. It is the narrower, more defensible claim that when the dots and the curve disagree, the base case should lean toward the curve — and that leaning has, historically, cost less than the alternative.
Disclosure
This note is editorial analysis for a demonstration site and is not investment advice, a recommendation, or an offer. The author holds no position in the instruments discussed. Figures are illustrative. See the full Methodology and Disclosures.
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