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Delay the 'dot plot'? Fed policymakers face communications quandary

[June 10, 2019] By Ann Saphir and Howard Schneider

SAN FRANCISCO/ WASHINGTON (Reuters) - As Federal Reserve policymakers grapple with how to downplay their quarterly "dot plot" projection of interest rates without eliminating it altogether, some are looking at a compromise: delay its release to reduce the chances that analysts treat it as a sneak peek of where Fed policy is heading.

Four times a year, the Fed releases a chart of "dots" representing the anonymous, individual rate projections of Fed policymakers for the next few years. Released at the same time as the group's monetary policy statement, the "dots" rate view sometimes overwhelms the more nuanced statement.

The idea for a fix comes amid a broad discussion of communications inside the Fed, and is unlikely to reach a resolution until next year.

Meanwhile the next dot plot will be published at the close of the Fed's June 18-19 policy meeting, when the central bank is seen keeping rates unchanged but acknowledging economic headwinds posed by rising trade tensions. How those headwinds are reflected in June's dots could prove dicey.

Fed Chair Jerome Powell has signaled growing frustration about the outsized sway of the dots on traders and investors who use it as a sort of forecast of Fed policy. That was never the intent envisioned by officials for the collection of 17 separate ideas about the appropriate path of rates, meant to be distinct from the collective outlook captured in the Fed's post-meeting statements.

"The problem with the dot plot is that it is released simultaneously with the statement," St. Louis Federal Reserve Bank President James Bullard said last week on the sidelines of a Fed conference on monetary policy strategy and communications.

That creates a "conundrum" for Powell, Bullard said.

"If it was released at some other time, that would maybe keep the transparency but reduce the conundrum aspect and (keep) the focus on the statement of the committee, which is really what the committee actually decided upon," he said.

Bullard has made no secret of his antipathy for the dot plot, and last week said he is unsure how much support the idea of a delay has among his colleagues. The Fed rarely makes changes without months if not years of debate.

Fed Vice Chair Richard Clarida is leading a subcommittee at the Fed to look at ways to improve communications around the dot plot, according to minutes of the Fed's March meeting.

In a paper on communications for last week's Fed conference in Chicago commissioned by Clarida, Brandeis University economics professor Stephen Cecchetti called for a speedier release of context around the dot plot, rather than a delay in publishing it.

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Federal Reserve Chairman Jerome Powell (C) speaks with Chicago Fed President Charles Evans (L) and St Louis Fed President James Bullard at a conference on monetary policy at the Federal Reserve Bank of Chicago, part of a 'Fed Listens' series as the U.S. central bank rethinks its long term strategies in the face of low inflation and low real rates, in Chicago, Illinois, U.S., June 4, 2019. REUTERS/Ann Saphir/

Currently details on uncertainty bands are released three weeks after the fact, with the minutes of the policy meeting; an anonymized matrix tying each policymaker’s economic forecast to its correlated rate projection takes five years, while full clarity on which dot belongs to which policymaker takes 10.

Delaying the release of the "dot plot" even just the three weeks until the minutes are published would be "unfortunate" and "dramatically reduce the information content of what’s being produced at the time of the meeting," Cecchetti told Reuters.

(GRAPHIC: The Fed's 'dot plot' dilemma - https://tmsnrt.rs/2WN7XOA)

NOT A MAP, BUT LOOKS LIKE ONE

Never intended as a consensus Fed forecast, the chart was first published in 2012 and quickly became a pillar of the Fed's efforts to keep policy easy because it so plainly showed policymakers agreed rates ought to stay low for a while.

More recently it has been a source of volatility. At the Fed conference last week, Powell said it has "distracted attention" from the important question of how the Fed might react to unexpected economic developments.

Take for example the version released at the end of the Fed's December meeting, which laid out in graphic form two more rate hikes for 2019.

Minutes of the meeting showed those projections were subject to "considerable uncertainty," and policymakers had collectively intended their post-meeting statement to convey a dependence on economic data to guide future action.

But those details were only published three weeks later and were not public in the immediate aftermath of the meeting.

At his December news conference, Powell was repeatedly questioned about the dot plot.

"I wouldn’t take it as a signal about current policy or about near-term policy," Powell said.

But, as Cecchetti noted in his paper, that's exactly what a cottage industry of "dotologists" try to do each quarter.

Escalating trade tensions and recent signs of a cooling labor market are currently stoking expectations in financial markets for three Fed interest-rate cuts by year end.

The most recent dot plot, released in March, showed all 17 Fed policymakers projected no change to rates over that stretch.

(Reporting by Ann Saphir and Howard Schneider; Editing by Dan Burns and Andrea Ricci)

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