When it comes to the Federal Reserve making forecasts about interest-rate conditions over the medium-term, St. Louis Fed President James Bullard is departing from his colleagues at the FOMC.
Bullard revealed that he was the one FOMC member (out of 17—10 of which are voting members) who abstained from participating in the committee’s quarterly forecast known colloquially as the “dot plot.” In other words, Mr. Bullard was the “missing dot” on the chart that summarizes the FOMC members’ future expectations of where the federal funds rate will move.
The problem that Bullard (among others) sees with the dot-plot projections is that they are often taken as gospel by the markets. However, they are merely the subjective opinions of the individual Fed officials and frequently don’t reflect what course of action is actually taken by the central bank, causing considerable confusion among market participants.
Bullard’s Missing Dot
The apparent logic of the projection is that it indicates the long-run interest rate target at which policymakers’ forecasts converge. According to Bloomberg, “The individual projections submitted by each official give traders and economists a hint at how quickly officials expect to raise interest rates and how far they’ll ultimately climb.”
The individual members may differ on what path the federal funds rate follows to get to this ending point, but the insights it potentially reveals is how much the members disagree with one another.
Bullard believes that, unfortunately, the economy is more complex and doesn’t necessarily “converge toward a single steady state” over the long run; depending on factors like productivity growth, “multiple regimes can evolve” and take shape, according to a paraphrase from reporter Jeanna Smialek. Bullard indicated that he thought the long-term forecast expressed by the dot plot had outlived its usefulness.
Bullard has criticized the entire notion of using a dot plot in the past. He’s not alone in doing so: the Bloomberg Editorial Board and former Minneapolis Fed President Narayana Kocherlakota (Bullard’s former colleague on the FOMC) have expressed similar opinions earlier this year. For his part, Kocherlakota believes it is the media and investors who misinterpret what the dot plot means, and that a few adjustments by the Fed could resolve the issue. The aforementioned editorial board thinks the practice ought to be abandoned altogether to avoid the confusion.
Another problem with the dot plot that deserves mentioning is that it includes (and makes no distinction between) the forecasts of voting and non-voting members of the FOMC, making it less instructive of the actual direction of future policy.
Yet, economist Carl Riccadonna believes we’re better off with the dots than without them. He acknowledges, “Although this communications tool may be imperfect, and is imperfectly understood by some market participants, its benefits far outweigh the costs.” He points toward the interest of transparency and the unprecedented task of managing monetary policy amid near-zero interest rates and the unraveling of the Fed’s massive QE purchases as compelling reasons to keep the dot plot around despite its deficiencies.
Nonetheless, one can hardly blame Bullard for his resistance to a tool that is so often the source of confusion and pointless debate.
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