Powell Disses Dots Again as He Stresses Limit of Fed's Knowledge

(Bloomberg) -- Jerome Powell dissed the dots when he was a Federal Reserve governor. Now he’s doing the same as central bank chairman.

In his first press conference since taking over as Fed chief, Powell advised investors against reading a lot into the central bank’s dot-plot projection for interest rates in 2020, saying policy makers “don’t have the ability to see that far into the future.”

He also minimized the significance of the economic forecasts that form the backdrop for the Fed’s rate expectations, noting on Wednesday that they were predictions of individual policy makers and not sanctioned by the Federal Open Market Committee. Powell contrasted that with the “one decision” the central bank made at the meeting, to raise the benchmark interest rate by a quarter percentage point.

“He definitely downplayed the dots,” said Michael Feroli, chief U.S. economist for JPMorgan Chase & Co. in New York, referring to the constellation of rate forecasts that the central bank portrays as dots on a graph. The Fed began publishing them under then-Chairman Ben Bernanke in January 2012, a few months before Powell joined the Board of Governors.

Despite Powell’s comments, investors remain “fixated” on the dot plot and what it might mean for policy, Feroli said. While the Fed stuck -- barely -- with its median projection of three interest-rate increases this year, it also forecast a steeper path of hikes in 2019 and 2020, based on officials’ median projections.

How the Fed communicates its intentions is critical for the conduct of monetary policy. If the central bank surprises financial markets, investors may respond in ways that hurt the economy. Case in point: the 2013 taper tantrum, when long-term bond yields shot up after Bernanke unexpectedly suggested scaling back the Fed’s bond purchases.

Long-Held Skepticism

Powell has long stressed the uncertainty surrounding the Fed’s assessments of the economy and the forces affecting it -- a point he made repeatedly in his kick-off press conference.

In an appearance at a monetary forum in New York in February 2016, Powell pointed to “shortcomings” in the dot plot, though he acknowledged it was helpful to investors.

Because the rate projections are anonymous and aren’t tied to individual economic forecasts, “there is no easy path to the identification of a committee reaction function” -- how policy makers will respond to movements in the economy, he said.

The quarterly chart also doesn’t distinguish between voting and non-voting members of the FOMC and at times can look outdated due to changes in the economic outlook in the interim, he added.

Paradoxically, Powell’s latest attempt to soft-pedal the Fed’s projections comes just as they’re coming more in line with those of some Wall Street economists. In their latest forecasting round, policy makers raised their outlook for economic growth and inflation while lowering their prediction for unemployment.

“The committee’s views are evolving in line with the data and financial conditions,” Goldman Sachs Group Inc. economists Jan Hatzius and Spencer Hill said in a note to clients on Wednesday.

Powell is not the first Fed chief to complain of the market’s focus on the dot plot. In her first press conference as Fed chair in 2014, Janet Yellen cautioned against looking to the projections for guidance on Fed policy.

Eventual Embrace

She later though embraced them as her fellow policy makers came around to her view that continued low interest rates were needed to nurture the economic recovery.

One big way that Powell could improve Fed communications would be to work on coming up with a consensus FOMC forecast for the economy and policy, along with indications of how the committee would react if its economic expectations turned out to be wrong.

The Fed tried that back in 2012 but failed. The U.S. central bank has “a very large committee and attempting to craft a consensus view of the outlook including a path of policy proved to be extremely challenging,” Powell’s predecessor Yellen told an economic conference in Frankfurt last year.

The process was further complicated because it was conducted against the backdrop of Fed asset purchases, so officials had to come together on both the rate path and the outlook for bond buying, she said.

Since then, the FOMC has agreed on a plan to gradually unwind its asset purchases, in one of Yellen’s last decisions as central bank chair.

The FOMC actually did make a forecast of sorts in the statement it issued just before Powell’s press conference.

“The economic outlook has strengthened in recent months,” the committee said.

It was a phrase that seasoned Fed watchers don’t recall the FOMC using before in a communique and one that Feroli said carried hawkish implications for policy. Yet it was “highly overlooked” by investors obsessed with the dots.

©2018 Bloomberg L.P.

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