Some Fed Officials Turn Cool on Their 'Dots'

Date : 12/12/2019 @ 10:59AM
Source : Dow Jones News

Some Fed Officials Turn Cool on Their 'Dots'

By Nick Timiraos 

Federal Reserve officials can't live with -- but can't live without -- their dots.

Fed Chairman Jerome Powell signaled Wednesday the central bank sees no need to move interest rates for the foreseeable future, and he suggested there is a lower threshold to reduce rates rather than to raise them.

One catch: Officials' interest-rate projections released the same day appeared to tell a different story.

Every quarter, the central bank produces a chart of 17 officials' individual projections for interest rates -- the "dot plot." A dot represents each official's expected value of the Fed's benchmark rate in coming years, and Wall Street investors scour this matrix for signs of how the policy makers' thinking on rates is evolving.

The updated chart released Wednesday showed no projected rate cuts from any of the officials. They also showed most don't expect the Fed will need to raise rates until 2021, when they foresee one or two quarter-percentage-point increases over the following year or two.

The discrepancy has to do with a limitation of the tool. Officials' rate projections correspond with the economic outlook they each regard as most likely under what they individually deem as "appropriate" policy. Markets look at the median projection as a rough proxy for the center of the rate-setting Federal Open Market Committee.

The projections are released quarterly at the same time as the committee's policy statements.

But while the policy statement is a product of extensive debate to ultimately reflect the committee consensus, the projections represent the officials' individual views, which can sometimes lead to confusion. Each submits his or her projections before their two-day meetings and they don't discuss or negotiate them at the policy meeting.

"Properly understood, it can be useful, but that's been a challenge," conceded Mr. Powell on Wednesday. "Particularly at inflection points, it's hard to convey the reality."

When the Fed introduced the instrument in 2011, the central bank's benchmark rate was near zero and officials expected it would stay there for months or years.

The tool was a type of guidance that helped convince investors that interest rates would stay lower for much longer than previously anticipated. Beginning in 2015, when the Fed started lifting its benchmark rate, the tool similarly helped set expectations of a gradual rate-rise path.

The Fed ended up delaying and then aborting interest-rate increases as the economy performed less robustly than expected. Some Fed officials say the tool should be de-emphasized or discarded altogether because in hindsight, it has provided too aggressive -- or "hawkish," in Fed parlance -- a projection of what ultimately unfolded.

"Most of the errors have been too hawkish," said Minneapolis Fed President Neel Kashkari in an interview last month. "So it's actually been providing hawkish forward guidance relative to both what the markets were saying ... and in terms of what the committee actually did."

Mr. Kashkari said he would prefer to get rid of the tool entirely, but he suspects too many of his colleagues still see value in it. "I don't suspect that's on the table," he said.

Richmond Fed President Tom Barkin said a better option would be to release the projections together with the minutes of the Fed's meeting, which are issued with a three-week delay. This would separate the dot plot, which doesn't attempt to identify a consensus view, from the statement, which does.

"At this point, I think [the dot plot] distracts from the conversation rather than helps it," he said in an interview earlier this year.

The dots often reflect officials' different assumptions about inflation, with officials who expect stronger price pressures projecting a steeper rate path. Because many officials earlier this decade expected faster inflation than what transpired, the chart produced "several puzzling years of the Fed signaling much higher rates than it subsequently delivers," said Jon Faust, an economist currently serving as a senior adviser to Mr. Powell, in a 2016 paper.

Mr. Barkin said he finds value in the exercise of making his projections even though he has misgivings about how they are communicated. They are "a great discipline for me ... to push myself on whether my thinking and my policy outlook is internally consistent," said Mr. Barkin.

Other reserve bank presidents and private-sector economists have said the tool still passes a cost-benefit test.

"People often take these statements and numbers a little too literally," said James Sweeney, chief economist at Credit Suisse. "It's still helpful -- seeing a survey with dispersed expectations gives market participants a sense of the scope of debate in the room, in that not everyone is thinking the same way."

On Wednesday, Mr. Powell played down the likelihood of rate increases projected after next year. "None of us have much of a sense of what the economy will be like in 2021," he said.

In a speech earlier this year, he tried to emphasize that the dots shouldn't be read in isolation from other Fed communication. To do this, Mr. Powell showed a snippet of a blurry bouquet of flowers from a pointillist painting by Georges Seurat, and then he showed the full landscape. "If you are too focused on a few dots, you may miss the larger picture," he said.

Write to Nick Timiraos at


(END) Dow Jones Newswires

December 12, 2019 05:44 ET (10:44 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.

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