Strictly speaking, Fed Chair Jerome H. Powell is not to blame for any of the above. He’s been sending the same message all year: The Fed will be guided by the data. Though he personally expected rates would go down at some point this year, such a move would occur only if the numbers on inflation and other economic indicators warranted it.
However, Mr. Powell’s “data dependent” message keeps getting undermined by a particular factor that is — also strictly speaking — under his and his colleagues’ control: the Fed’s quarterly publication of something called the “dot plot.”
Officially titled the Summary of Economic Projections, the dot plot is a chart depicting the 19 Fed leaders’ estimates of what economic growth, inflation, unemployment and — crucially — the Fed’s benchmark interest rate will be by year’s end. Each dot represents one of the 19 forecasts. Fed officials have been notoriously bad forecasters over the years. The latest dot plot, issued March 20, showed that most Fed leaders see the benchmark rate declining from nearly 5.5 percent to under 4.75 percent by Dec. 31. In other words: three rate cuts of 25 basis points each. The problem, of course, is that the latest inflation data is hard to square with this projection. Instead of guiding markets, the dot plot is confusing them. In recent public pronouncements, Mr. Powell has suggested that the Fed is in wait-and-see mode on rates, but the dot plot still signals that it is about to cut, cut, cut.
This has gone on long enough. The Fed should stop releasing the dot plot to the public.
Like so many other mistakes in policy or process, the origins of this one lie in good intentions. When the Fed decided to make the dot plot public in January 2012, it made sense. The world was just beginning to heal from the crippling 2008 financial crisis and Great Recession. The Fed had cut interest rates to zero to try to revive the economy, but it was a slow rebound. Many Americans were still frustrated and out of work. “We hope to convey to the market the extent to which there is support on the committee for maintaining rates at a low level for a significant time,” then-Fed Chair Ben S. Bernanke said. In other words, the dot plot was a way to express hope — and belief — that the economy would return to normal.
Mr. Bernanke acknowledged the risk of misinterpretation and warned that the dot plot “should not be viewed as unconditional pledges.” At the time, though, the risk was relatively low because everyone understood that interest rates would remain basically zero for a long time. Indeed, the Fed didn’t begin lifting rates — slowly — until December 2015. Nowadays, when the Fed is in inflation-fighting mode and interest rates are at a 20-year high, the dynamics are totally different. The Fed needs flexibility above all else. Inflation is stuck around 3 percent, which is uncomfortably above the Fed’s goal of 2 percent. If inflation ticks back up, the central bank might even have to raise rates again. Even in the likelier scenario that inflation comes down a tad, the Fed will still have to decide whether it’s enough progress to justify a rate cut.
No matter how many times Mr. Powell says the dot plot is just a forecast and not a policy plan, the dots are being taken literally — which ties his hands. He and other Fed leaders have plenty of other ways to share their thinking publicly: speeches, interviews, conferences. Some even use blogs and social media. There might have been a time when publishing these inevitably contingent forecasts was indispensable to Fed transparency, but that time is gone. Ditching the dots is the right call, both for markets and for the Fed itself.
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