“I did not submit a dot. For me, it’s not helpful in the conduct of policy.” Kevin Warsh said that at his first press conference as Federal Reserve chair, and it was the detail that drew the most notice.
The Fed’s dot plot is published four times a year. Each participant in the Federal Open Market Committee submits projections for growth, unemployment, inflation and the policy rate, and the rate forecasts appear as anonymous dots on a chart, each showing where one official thinks rates should stand at the end of a given year. At the June meeting there were eighteen dots from nineteen participating officials. Warsh was the missing one.
He told reporters the projections are written in pencils with “big erasers.” Conditions are uncertain and shift quickly, he said, and the dots capture officials’ view of the most likely of several scenarios, not outcomes they hold with much confidence.
An Experiment With Markets
Carola Binder, writing for the Civitas Institute, reads the move as more than a quarrel over a chart that mostly bond traders study. In her view it points to a broader rethink of what the Fed tells the public and how power is divided inside it. She calls it “a sort of information experiment.”
Warsh’s argument, as Binder lays it out, is that the Fed has grown so intent on guiding markets that markets can no longer guide the Fed. “Financial market prices are probably the most important source of information to guide central bankers,” Warsh said. He put the problem bluntly: “When all the financial markets are doing is reflecting back what we’ve said, then we’re taking the most important source of information and we’re being blind to it.”
Forward guidance, the practice of signaling where rates are headed, is fairly new. The Fed did not announce changes to its target rate after every meeting until 1994, Binder notes. The dot plot arrived in 2012. Markets routinely treat its median as the expected path for rates, even though the dots are formally conditional forecasts and not promises.
Fewer Forecasts, More Weight on the Chair
Binder sees merit in dropping the dot plot’s false precision, but she does not want the Fed to simply say less. Her view is that the central bank should keep explaining the principles behind its decisions, meaning what changes in inflation, employment or financial conditions would justify higher or lower rates.
She also flags a risk. Without the dot plot, minutes and other formal records, investors may lean harder on the chair’s own reading of the committee. Warsh noted that the committee weighed only one principal policy proposal at the meeting, not the usual range of alternatives. That may sharpen debate, Binder writes, but it adds to the chair’s power over the agenda.
Warsh took office with inflation above the Fed’s two percent target and with President Donald Trump among those who have repeatedly criticized the central bank.
