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Powell may face 'tap dance' over Fed's new dot plot forecasts

The Federal Reserve's new "dot plot" projections are likely to show a flat interest rate outlook for 2019, perhaps disappointing investors who expect rate cuts.

But markets should quickly get some reassurance from Fed Chairman Jerome Powell, who analysts expect to downplay the dot plot at his June 19 news conference. Analysts say he will reiterate that the Fed is prepared to take action if the economy needs an easier policy, even if the dot plot projections suggest officials prefer keeping rates flat.

"Powell will have to tap dance at the press conference," wrote Michelle Meyer, head of U.S. economics at Bank of America Merrill Lynch. "The goal will be to keep options open with the possibility of a cut in July but not a pre-commitment."

It will be a tricky balancing act for the Fed chief, and the "opportunity for misunderstanding is certainly there," said Michael Skordeles, U.S. macro strategist at SunTrust Advisory Services Inc.

"I think he can do it, [but] I would be remiss if I didn't think it's possible that the market might misinterpret what he says," Skordeles said in an interview.

Fed officials are expected to keep their benchmark federal funds rate unchanged at their June meeting, sticking to the wait-and-see stance adopted this year. The Federal Open Market Committee meeting will also feature the release of Fed officials' quarterly projections, which show their expectations for where they should set interest rates in the next few years. Policymakers' individual projections are shown as anonymous dots.

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The dots will likely come in "flat as a pancake" for 2019, indicating that most Fed officials would keep rates unchanged if the economy sees no major surprises, Monetary Policy Analytics analyst Derek Tang wrote in a research note. But surprises are possible in an economy that at times has seen "large, frequent, unexpected changes," Powell said in a June 4 speech.

The speech buoyed markets that day due to his comments on one possible surprise: uncertainty over trade negotiations between the U.S. and other countries. The Fed does "not know how or when these issues will be resolved," but officials will "act as appropriate to sustain the expansion," Powell said. Investors took that as a sign that the Fed is moving toward their long-held view that the central bank will cut interest rates this year, a belief that some economists think is too pessimistic.

The dot plot has at times been a source of frustration for Fed officials, who worry that markets read too much into the median projection from policymakers and view it as a firm commitment from the central bank. Focusing on the median forecast amounts to emphasizing "what the typical FOMC participant would do if things go as expected," Powell said in his speech.

"Unfortunately, at times the dot plot has distracted attention from the more important topic of how the FOMC will react to unexpected economic developments," Powell said. "In times of high uncertainty, the median dot might best be thought of as the least unlikely outcome."

Powell and other Fed officials have said the U.S. outlook remains positive, but they are watching how risks unfold. New York Fed President John Williams, for example, said recently that his baseline forecast is a "very good one," but he does not "put a lot of conviction" in it right now.

The Fed chief will likely emphasize the risks to officials' baseline outlook that could prompt them to "deviate substantially from what's reflected in the dot plot," Morgan Stanley Chief U.S. Economist Ellen Zentner wrote in a research note.

"One, perhaps two, dots could favor cuts this year, but we don't expect a broad-based shift lower in the dots for 2019 because the Fed does not pre-plan easing cycles," she wrote.

The Fed is also weighing changes to the dot plot as part of its broad review of its monetary policy framework and communications. But analysts do not expect any announcements on adjusting the dot plot, or perhaps eliminating it, just yet.

One potential change is highlighting the "uncertainty bands" surrounding the median rate projection. Right now, the Fed waits three weeks before releasing that information. But a paper presented at a Fed-hosted conference this month suggested the Fed release those uncertainty bands "more prominently and quickly."

In March, the median projection from Fed officials indicated they saw their benchmark rate at 2.4% at the end of 2019, unchanged from the current target level. But the uncertainty bands suggested officials could also see the rate somewhere between 1.5% and 3.3%.

A greater focus on outlook uncertainty "would help shift the public discussion," wrote the paper's authors, Stephen Cecchetti and Kermit Schoenholtz.

"Rather than responding with false precision to questions about the median path of policy rates, a focus on the uncertainty associated with the outlook would help to align the Chair's public comments with the risks that the FOMC perceives," they wrote.