Powell Is Concerned About Dots

In Jerome Powell's speech on Friday, he displayed a huge concern over the dot plot, an estimation of future rate hikes.

The dot plot is an estimation by Fed participants of the path of future rate hikes. Powell is concerned about the plot. After all it has been practically useless.

Powell talked at length about dots in his speech on Friday Monetary Policy: Normalization and the Road Ahead.

As readers of the FOMC minutes will know, at our last meeting in January there was an impromptu discussion among some participants of general concerns about the dots. My own view is that, if properly understood, the dot plot can be a constructive element of comprehensive policy communication. Let me follow my two predecessors as Chair in attempting to advance that proper understanding.

Each participant's dots reflect that participant's view of the policy that would be appropriate in the scenario that he or she sees as most likely. As someone who has filled out an SEP projection 27 times over the last seven years, I can say that there are times when I feel that something like the "most likely" scenario I write down is, indeed, reasonably likely to happen. At other times, when uncertainty around the outlook is unusually high, I dutifully write down what I see as the appropriate funds rate path in the most likely scenario, but I do so aware that this projection may be easily misinterpreted, for what is "most likely" may not be particularly likely. Very different scenarios may be similarly likely. Further, at times downside risks may deserve significant weight in policy deliberations. In short, as Chairman Bernanke explained, the SEP projections are merely "inputs" to policy that do not convey "the risks, the uncertainties, all the things that inform our collective judgment."

Effectively conveying our views about risks and their role in policy projections can be challenging at times, and we are always looking for ways to improve our communications. I have asked the communications subcommittee of the FOMC to explore ways in which we can more effectively communicate about the role of the rate projections. For now, let me leave you with a cautionary tale about focusing too much on dots. Here is a picture composed of different colored dots (figure 2). The meaning of it is not clear, although if you stare at it long enough you might see a pattern. But let's take a step back (figure 3). As you can see, if you are too focused on a few dots, you may miss the larger picture.

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Sensible Cents 1 year ago Member's comment

And what about figures 1 and 4? Where are those?