We do not know if Federal Reserve Chair Janet Yellen will be commenting in her showcase luncheon speech later today at the Economic Club of New York on the “rate dots” included in the quarterly Summary of Economic Projections, but she will almost certainly be asked about them.
What we do know is that the Fed is already looking into tweaks to their presentation, as it is very aware of the mixed message it has been sending regarding the dot plots. Fed officials turned to them as an affirmation of the Federal Open Market Committee view on its rate policy guidance in December and September, but in June and most recently in March, less so, and going out of their way to downplay their value to the intended guidance. So at some point before too long, the Committee will have to come clean on how they want to utilize the first rate hike year and year-end fed funds rate projections going forward.
In the meantime, before the June statement and SEPs, Fed officials are likely to go out of their way to stress the rate dots are not central to the forward policy guidance crafted and voted on in the formal statement, but are meant more as a survey of the appropriate rate path assumptions by the Board and District research staff going into each meeting.
Multiple Ideas on the Table
Among the ideas being weighed is to finally go ahead and just identify the Committee members to their dots. The problems with that are obvious, in that Chair Yellen’s dot would have an out-sized influence in market pricing even if it is not necessarily reflective of where the forward guidance would end up. We think that proposal will be a tough road to tread. Even more unlikely is to identify voter versus non-voter, or Board versus District.
There is value in the dots as they reflect the appropriate rate path assumptions put together by the 13 different research staffs across the Fed system. The dots may not be part of the formal forward policy guidance of the statement, but they do provide a useful backdrop and context to the discussions that went into the intended guidance of the statement.
There are also a number of other revisions to the dots that are being considered. One would be to find a way to visually present a more explicit link between the still anonymous rate dots to the underlying growth, unemployment and inflation projections of the dotter’s staff work. That would provide a more useful means of gauging the reaction function on rates and the changing forecast.
Another suggestion is to release the dot plot and economic forecasts before the FOMC meeting. The idea is to reinforce the contextual basis of the dots, in that they are a survey of the assumptions going into the meeting, but are not necessarily meant to reflect the policy decision and guidance fashioned over the course of the discussions during the two day meeting.
The dot plot and economic forecasts are turned in the Friday before the meeting, meaning it might be possible to release the dots on the Monday before the two day meeting. While the pre-release would help convey the preparatory nature of the dots, one issue to weigh is whether their early release could invite unwelcomed volatility, especially if there were a growth surprise in the preceding quarter and the dots displayed sharp movements from the previous quarter’s dots.
The market reaction could also be taken by some Committee members as limiting their options in the meeting. And as we have previously noted, Committee members do have the option before the dots are released to adjust the dots with which they came into the meeting. Doing so is rare, however, if for any other reason, the appropriate rate path assumptions going into the dots are the work of the Board and District staff, and if a President opts to radically alter his dot, he will have to go home to an irritated staff to explain why.
A Quarterly Monetary Policy Report
Ultimately, and this is why it may take a while before the dots reach their ultimate form, the ideal would be for the SEPs and dot plots to evolve into a broader quarterly Monetary Policy Report in a similar format to the Bank of England’s Inflation Report.
Producing a quarterly report would entail enormous additional work for the staff, but doing so would provide the opportunity to present a more thorough narrative and background to the assumptions, or explain in greater detail the labor market and inflation indicators the FOMC is most closely monitoring. For instance, a MPR for March could have included a fuller explanation to why the longer run neutral interest rate is “below normal” in the years ahead.
A quarterly MPR was in fact the intention of the work several years ago under then Vice Chair Yellen when she chaired a communications subcommittee. It came up short of its goals when the committee could not get to a consensus on how to fashion a unified forecast while still maintaining the autonomy of the 12 districts and the Board staff work.
Taking the dots to the next stage of their evolution on the twin tracks of a general greater transparency and forward policy guidance may end becoming the task of the incoming Vice Chair Stan Fischer. For one, there is a certain tradition of Vice Chairs taking on the communications challenge, as Yellen did and former Vice Chair Don Kohn did before her.
Fischer also has plenty of experience dealing with issues of autonomy, or staffs with strongly held views during his tenure at the International Monetary Fund. So perhaps he will be able to fashion the dots and forecasts into something new before too long, certainly by the time the last of the large scale asset purchases have been tapered to a close and a first rate hike is nearing.