Clarification on Connecting the dots: March FOMC edition
I updated the “In closing” section above the paywall based on a reader’s question. I explain more clearly why the “do nothing” to the dot plot would be the best action for the Fed this week. I am a long-standing critic of the dot plot as a communication tool, but the Fed’s current hyper-data-driven approach makes the dot plot even more problematic.
In closing.
What should the Fed do with the dots? Nothing.
Why? Powell and other Fed officials have repeatedly told us that in this cycle, the first rate cut hinges on more good data on inflation, and that alone. It’s not about the Fed’s forecast for inflation with the good data they already have.
The current hyper-data-driven approach is not standard practice in monetary policy, and it was certainly not the approach when the dot plot was created. Normally, the Fed uses forecasts based on the available data to make rate decisions. That standard approach is consonant with the dot plot but not the current one. Words and dots are in conflict in concept, and the dots risk unnecessary volatility.
If anything meaningful changes for 2024 dots, it will be a wild afternoon. We have had more than enough wild rides. Here’s to a snoozer of a meeting!
Here is a link to the updated post in full.
Connecting the dots: March FOMC edition
More than ever, markets will grasp for any scrap of certainty at the FOMC meeting. At the start of the year, markets expected the Fed to start easing the brakes on the economy this month and cut the federal funds rate by 25 basis points. Early on, the Fed pushed back and basically said that March would be too soon, and then we got two disappointing, though not alarming, reads on inflation for January and February. That took March completely off the table and made May quite unlikely, too.
The dots are meaningless with a data dependent fed. The Fed needs to cut back a bit on the transparency. Press conferences after the meetings are enough, along with the bank presidents and governors speaking. It would be helpful if fomc members would dissent more often when they disagree. A good first step would be to have a dot plot for the next 3 meetings. After a reasonable amount of time just eliminate them. I heard a central banker state that monetary policy was best done in an iterative fashion. I cannot understand why the fomc would not cut 1/4 now and wait. It's pretty clear they want to cut. So get on with it. If the data is not as good as expected just put policy on hold.
“Basically, we are set up for another example of why I hate the dots. A handful of people anonymously, with no review of their thinking, no accountability, and possibly not even voting this year, could increase the interest rates to buy a home or open a business almost immediately via the market reaction to the dots.”
Cripes, can someone buy these people backgammon sets? Then, the can play with ‘dots’ and do no harm.