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revealed in the minutes of the Fed’s Jan. 26-27 meeting, is to bring in yet another shape: a fan.
A fan chart would show the range of uncertainty around a forecast, a band that would spread wider the further the forecast extends. (Hence the fan.) Another possibility discussed by academics and former Fed officials is to leave the dots as they are and focus instead on describing scenarios. There could be charts of how policymakers would respond to shocks and surprises.
This is what they’re trying to communicate all the time. According to transcripts of FOMC meetings, the committee’s staff already does this using a computer-generated scenario with a Fed funds rate path. “I like that idea better than a fan chart,” says Laura Rosner, U.S. economist at BNP Paribas in New York. Yellen, she says, “could walk us through the scenarios in her press conference and discuss how policy might respond.”
Although Johns Hopkins’s Faust favors retiring the dot plot, he says it still achieves two of the big goals of former Fed Chairman Ben Bernanke, who first instituted it. Bernanke wanted all of the FOMC members, not just the chair, to be seen as authorities on policy. And he wanted those members to be more accountable. The dots provide a hint of their views and of how diverse they are.
In March, for example, one member saw the federal funds rate going up to about 2 percent by 2018. Another member saw rates rising close to 4 percent. For her part, Yellen, in 2014 at her first news conference as chair, said the public “should not look to the dot plot” as the main way the Fed communicates. She said to look instead at the central bank’s official statement.
Of course, the dots may simply show the Fed has had too rosy a view about the pace of the economic recovery. “I always laughed at the dots,” says Karl Haeling, head of strategic debt distribution at Landesbank Baden-württemberg in New York. “They have always been overly optimistic.” �Craig Torres
The bottom line Markets have noticed that Federal Reserve officials' interest rate forecasts aren't terribly accurate.
Edited by Pat Regnier Bloomberg.com