US FEDERAL Reserve chair Jerome Powell on Friday (Mar 7) signalled potential changes for the Fed’s closely watched “dot plot” interest-rate projections as part of a broad policy framework review underway at the US central bank and expected to wrap up by the end of summer.
“On the communications…particularly our post-meeting communications, we are going to take a close look at the SEP and also compare ourselves to what other central banks around the world do,” Powell said at a research conference in New York, referring to the Fed’s summary of economic projections.
That is the Fed’s quarterly report on what each of its 19 policymakers expect for economic growth, the unemployment rate, inflation, and the Fed’s own policy rate over the next several years.
Individual policy-rate projections are plotted as dots on page 4 of the report, published at the end of the Fed’s rate-setting meetings each March, June, September and December. Economists and financial markets use those dots as a guide to what the Fed sees as most likely to do on rates.
Supporters of the dot plot say it can make monetary policy more effective, noting that in the wake of the global financial crisis, the Fed’s dot plot underscored US central bankers’ expectation they would be keeping rates at zero for much longer than markets might have otherwise expected.
And, they note, it can be helpful as a rough directional guidepost, even if it – as Fed policymakers and Powell himself often emphasise – is not a promise or even an agreed-upon forecast, but rather a collection of sometimes disparate views on how the economy, and policy, will play out.
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Historically, they have often proven poor yardsticks for actual Fed rate moves, in large part because the economic data turns out differently from what is expected by Fed policymakers and, often, economists more generally.
At the end of 2021, for instance, the dot plot pointed to an end-2022 policy rate of less than 1 per cent. In fact, the central bank had raised rates to 4.25 to 4.5 per cent, a response to the realisation that building inflation was not going to recede without an aggressive Fed rate-hike campaign.
Over the years, Fed policymakers and economists have made a range of suggestions about how to improve the dot plot, which has been published in its current form since well before Powell became chair in 2018.
At the research conference Friday, former Fed vice-chair Don Kohn noted that the median of the 19 projections does not capture the uncertainty and the various alternative scenarios that may be nearly as plausible. He suggested the Fed show what economic assumptions underlie each individual policymaker’s view of appropriate policy, which would allow analysts to better understand the Fed’s “reaction function”.
A review of other global central banks’ approaches could raise other possibilities. The European Central Bank, for instance, issues a regular staff forecast on inflation that helps guide rate-path expectations.
The Reserve Bank of New Zealand and some others publish inflation forecasts along with a policy rate path that is consistent with delivering an on-target rate of inflation.
The Bank of England offers a “fan chart” of possible future paths for inflation and growth, an approach that former Fed chair Ben Bernanke recently advised it to ditch in favour of publishing a range of alternative scenarios for both the economy and for rates. REUTERS
