Fed’s ‘dot plot’ looks in­creas­ingly out of touch on rates

The Pak Banker - - FRONT PAGE -

SAN FRAN­CISCO: The Fed­eral Re­serve's rate path "dot plot" has be­come in­creas­ingly de­tached from fi­nan­cial mar­kets' in­ter­est-rate pro­jec­tions and risks send­ing an overly hawk­ish mes­sage that may un­der­mine the cen­tral bank's cred­i­bil­ity. De­spite fall­ing in­fla­tion ex­pec­ta­tions and tur­moil in fi­nan­cial mar­kets this week as con­cerns about growth mounted, the Fed hewed to its mes­sage that it could build on De­cem­ber's rate rise with fur­ther hikes in 2016. Quite how many rises is un­clear, and there is just one tool econ­o­mists can use to get an idea: a chart in the Fed's quar­terly "Sum­mary of Eco­nomic Pro­jec­tions" known col­lo­qui­ally as the dot plot. The chart shows in­di­vid­ual Fed­eral Re­serve rate set­ters' ex­pec­ta­tions, al­though they are not iden­ti­fied by name.

Both Fed Chair Janet Yellen and New York Fed Chief Wil­liam Dudley sug­gested this week that rate rises were still on the cards, point­ing to the un­der­ly­ing health of the U.S. econ­omy. Nei­ther re­ferred di­rectly to the "dot plot" that en­vis­ages four rate hikes this year, ver­sus mar­ket pric­ing of a one in three chance of even a sin­gle rate rise this year. Fed of­fi­cials say that while the dots, is­sued ev­ery quar­ter, do not rep­re­sent a rate path per se, they can be used to man­age ex­pec­ta­tions. "Part of the prob­lem is that it is con­sis­tently wrong," said Tim Duy, an eco­nom­ics pro­fes­sor at the Univer­sity of Ore­gon. "The se­cond part of the prob­lem is that the Fed doesn't seem to rec­og­nize how ter­ri­ble their fore­casts have been."

Fed of­fi­cials have had to reg­u­larly ratchet down their dot-plot fore­casts since they be­gan pub­lish­ing them four years ago. At the time the Fed said the pub­li­ca­tion of in­di­vid­ual rate fore­casts would give mar­kets a bet­ter idea of where the Fed was head­ing. Econ­o­mists say it was a use­ful sig­nal­ing tool to re­in­force the bank's com­mit­ment to zero rates. "I think they have out­lived their use­ful­ness and they risk send­ing a sig­nal that (Fed of­fi­cials) have a 'plan' rather than that they are data de­pen­dent," said JP Mor­gan econ­o­mist Michael Feroli.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.