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Dot plots could be 'doing more harm than good,' Fed's Bullard says

The Federal Reserve's current approach to signaling future interest rate moves may be "causing more problems than it's solving" and could be improved or replaced, St. Louis Fed President James Bullard said Feb. 21.

In an interview with S&P Global Market Intelligence, Bullard laid out two possible alternatives the Fed could consider as officials weigh whether they should overhaul the "dot plot," a closely watched graph that shows individual Fed officials' projections, represented as dots, of where they think the benchmark rate should be in the coming years. The postcrisis innovation helped markets sense how long the Fed planned to keep rates at near-zero levels, and it laid out the potential pace of the gradual rate hikes the Fed began in December 2015.

The dot plot had a "great role to play" when the Fed had rates at near-zero levels, but now it shows a "hodgepodge of dots" that do not adequately communicate the uncertainty among Fed officials over where they think rates should go, Bullard said.

Fed officials debated at their January meeting whether the public may be misinterpreting the projections, minutes of the meeting showed. Some officials thought they are a "valuable component" of their outlook, and others worried that the markets think the median dot shows the consensus view at the central bank or that officials have a pre-set policy path in mind, the minutes said.

In a Feb. 19 speech, Cleveland Fed President Loretta Mester said the uncertainty bands around the Fed's projections "deserve more attention" and that the dots can shift depending on how the economy is unfolding.

"The fact that the dots can change over time because of economic developments is a design feature, not a flaw," she said in prepared remarks.

In the interview, Bullard said the markets have taken the median dot as an "implicit promise of what we're going to do in the future."

That interpretation caused problems at the December 2018 meeting. Fed officials had previously signaled through the median projection that they would raise rates four times in 2018. But that "put us in a box" as officials headed into the last meeting of the year, Bullard said.

The Fed ended up pulling the trigger on the expected rate hike even though the economic outlook had gotten more uncertain. Bullard had cautioned against rate hikes in 2018 and has praised the Federal Open Market Committee's current shift away from rate hikes. He rotated into an FOMC voting spot this year.

One potential fix to the dot plot, Bullard said, would be switching away from laying out projections for each calendar year. For example, officials could show what their views are for the year ahead and two years ahead. That, he said, could have helped to allow Fed officials to keep rates flat in December and hold off on a rate hike until one of the 2019 meetings.

"Your horizon is getting shorter and shorter as you go through the [calendar] year," he said of the current approach.

While he said that change would be relatively minor, Bullard also laid out another option that Fed officials could look at: eliminating the dot plot and having regional Fed banks publish forecasts individually. To some extent, the banks are already regularly putting out projections, he said, pointing to the Atlanta Fed's GDPNow forecast as one example.

The Washington-based members of the Board of Governors could decide on their own format of putting out similar information, such as in their current monetary policy reports to Congress.

Bullard said he was sympathetic with the potential view that scrapping the dot plot could be seen as the central bank holding back some information, a shift from the Fed's recent efforts to become more transparent. But changing the dot plot should be viewed more as a reorganization of its current forecasts, rather than doing away with them entirely, he said.

"I'm very sympathetic with that, but here, we're putting out information that's maybe doing more harm than good," he said.