Lack of clarity on uncertainty at the Fed

The Federal Reserve has just published the fresh Summary of Economic Projections, including the so-called "dot plot" representing policymakers' assessment of the future rate path. There has been quite a lot of talk about the "dot plot" presenting substantial communication challenges.

The message of the newly-released "dot plot" was immediately interpreted as being dovish by markets, since the chart showed policymakers expected two quarter-point hikes by the year's end, half the number seen in December.

The language of the FMOC's post-meeting statement underlined the image of the data-driven Fed:

The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate... However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

Yet, the "dot plot" in its current form lacks clarity on uncertainty surrounding the rate projections. As a result, the published rate path seems to relay an overly strong message about policymakers' intentions.

Jerome Powell, Member of the Board of Governors of the Federal Reserve System, said in a recent discussion of the paper “Language after liftoff – Fed communication away from the zero lower bound”:

On occasion, the dot plot and the post-meeting statement have seemed to send conflicting signals. The dot plot reflects individual views of appropriate policy, while the post-meeting statement reflects the consensus of the Committee.

I agree with the paper’s suggestion of greater emphasis on the degree of uncertainty around the projections, which is much larger than the dispersion of the individual forecasts... Fan charts could help emphasize that the economic outlook is uncertain, and that consequently there is considerable uncertainty around the path of policy.

Yup, the way to make the "dot plot" more helpful as a communications tool is to adopt the practice of central banks such as the Riksbank and the Czech National Bank, and use fan charts to illustrate uncertainty around the rate projections.