Lazy Fed Forecasts Are a Disgrace. Let’s Do Better

The Federal Reserve will begin a review of its monetary policy framework later this year, including a potential reconsideration of the ways it communicates with the public. Of great interest is the fate of the dot plot, an anonymous collection of policymakers’ interest rate projections that generates considerable attention each quarter on Wall Street.

The dots have many detractors who think that they confuse more than they clarify, and an objectively amateurish release last week — which was marred by a failure to incorporate information into the projections from that morning’s inflation report — should only add to the controversy. But policymakers must focus on improving the dots and ignore those who suggest abandoning them.

Let’s start with what the dot plot tells us. Part of the broader Summary of Economic Projections published quarterly, the dots are an anonymized display of where Federal Reserve Board members and Federal Reserve Bank presidents see rates going. Upon its release, most of the focus turns to the median dot, in part because that’s what the rate-setting committee chooses to highlight in its presentation document. But the median projection is only a small part of the picture — as are the mean and the mode — since the contributors aren’t participants in a pure democracy.

At any given time, only 12 of the 19 contributors to the survey have a vote, and Chair Jerome Powell’s view matters in practice far more than everyone else’s. His inner circle includes the vice chair and the president of the Federal Reserve Bank of New York, so their views matter more, too.

In addition, market participants have to contend with questions around the timeliness of the projections. Last week, for instance, the Fed released a new edition of the dots about 5 ½ hours after a surprisingly good inflation report that should have at least some positive impact on the perceived path of prices and interest rates this year. Powell characterized the numbers as “a better inflation report than almost anybody expected,” yet he also suggested that few people bothered to change their forecasts to incorporate the new information.