Federal Reserve Chair Jerome Powell indicated on Friday that adjustments may be made to the Fed’s “dot plot” interest-rate projections. This potential change is part of a comprehensive review of policy frameworks at the U.S. central bank, expected to conclude by the end of summer.
Powell emphasized the need for improved communication, particularly regarding the Summary of Economic Projections (SEP) and comparisons to the practices of other central banks globally. The SEP, released quarterly, reflects the expectations of the Fed’s 19 policymakers regarding economic growth, unemployment, inflation, and the future policy rate.
The individual projections are illustrated as dots, which serve as a vital indicator for economists and financial markets on the Fed’s anticipated interest rate path. Proponents of the dot plot argue that it enhances monetary policy effectiveness, especially highlighted during the global financial crisis when it indicated a prolonged period of low rates that markets might have underestimated.
However, critics point out that the dot plot can fail to accurately predict actual Fed rate changes, as economic conditions often diverge from earlier forecasts. For example, in late 2021, the dot plot suggested a policy rate of under 1% for 2022, yet the Fed ultimately raised rates to 4.25%-4.50% due to unexpected inflationary pressures.
Suggestions have been made over the years to refine the dot plot, which has remained unchanged since before Powell’s chairmanship began in 2018. Former Fed Vice Chair Don Kohn proposed that the Fed should clarify the underlying economic assumptions influencing each policymaker’s projections.
This would provide analysts with greater insight into the Fed’s decision-making process. Looking at global practices, the European Central Bank, for example, provides regular inflation forecasts to guide expectations.
Other central banks, such as the Reserve Bank of New Zealand, publish alignment between inflation forecasts and policy rate paths. Additionally, the Bank of England utilizes a “fan chart” to represent potential future paths for inflation and growth, although recent suggestions from former Fed Chair Ben Bernanke recommended moving to a framework that presents alternative economic and rate scenarios.