EC What To Expect From The Fed's Strategic Review

The U.S. Federal Reserve (the Fed) is undergoing a once-in-a-decade strategic review, with an announcement of its results expected sometime during the first half of the year. 

There are three broad areas under the central bank’s consideration:

  • The adequacy of the Fed’s current policy toolbox and how it could be expanded.
  • The Fed’s communication with the public and how it could be improved.
  • A review of its policy strategy—specifically, if the Fed should make up for past inflation misses.

Are changes to the dot plot in the works? 

Ironically, the communication channel is the most opaque in terms of any changes that are under consideration. One area that’s sure to be ripe for discussion is what’s known as the dot plot—the chart that displays each Federal Open Market Committee (FOMC) member’s projections on what the federal funds rate should be. It’s no secret that the FOMC doesn’t like how investors latch onto the dots without properly considering the uncertainty around each participant’s (i.e., dot’s) baseline forecast. So, what might change following the review? We could potentially see the dot plot augmented by something such as the following fan chart going forward. The Brookings Institution also detailed several other ways to improve the dot plot a few years back. It’s worth noting that we do not expect any changes to the communication strategy to be particularly impactful for asset prices.

(Click on image to enlarge)

Example of different dot plot

Key watchpoint: Policy toolbox review

The review of the Fed’s policy toolbox is likely to be more interesting, as we think through the economic and market implications of the next U.S. recession. The impetus for this review is an understanding that, with lower equilibrium interest rates, even a mild recession could force the Fed back to the lower bound—which occurs when the short-term nominal interest rate is at or near zero—and constrain its ability to provide accommodation. There has been a lot written and said about this subject across the Federal Reserve System and private-sector economists.

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Disclosures

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.

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