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The Fed: Fed doesn’t want anyone paying attention to the dot plot, but here are 3 things investors won’t want to miss

Finance

By

Senior economics reporter

Fed Chairman Jerome Powell said last week he has asked the FOMC’s communications subcommittee to look at the role of the central bank’s interest rate projections.

Since it started in 2011, the Federal Reserve has had a love-hate relationship with its “dot plot,” its graph containing the interest-rate path. These days it’s leaning towards hate.

Many of the central bankers have tried to down play the rate hike projections in the run-up to next week’s meeting. But it’s the first thing economists want to talk about when you ask them about the meeting.

Fed officials will meeting for two days starting on Tuesday March 19. At the end of their meeting Wednesday, they will release a statement and their latest economic forecast and interest-rate projections at 2 p.m. Eastern. Fed Chairman Jerome Powell will cap it off with a press conference at 2:30 p.m.

At the Fed’s January meeting, when no dot plot was published, the central bankers engineered a U-turn in policy, telling the market it didn’t know whether the next “adjustment’ in interest rates would be to raise or lower them. This “patient” stance was justified by a weak global outlook and tame inflation, Powell said.

This was a far cry from what Fed officials anticipated in December, when the last dot plot was published. At the time, the median forecast from the central bankers was for two rate hikes. And two Fed officials were penciling in five hikes by the end of 2020.

Here are three things that economists said they will be watching for from the dot plot.

How many interest-rate hikes will the dot plot project ?

The safe bet, favored by most economists, is the Fed lowers the projected path on interest rates to one hike in 2019 and one more in 2020.

It would take only 3 officials to cut their outlook for interest rates to lower the Fed’s median forecast down to one hike. It would take 7 officials to move to lower it to zero.

Minutes of the Fed’s January meeting show Fed officials broke into two camps about future interest-rate hikes in January.

One camp argued that rate increase might be needed only if inflation outcomes were higher than Fed officials expect. However, several others thought it would be appropriate to raise the federal funds rate later this year if the economy broadly performed as expected.

Having one rate hike penciled in will be a communications challenge for the dovish Fed. It would contradict the message sent to markets after the January meeting, said Kevin Cummins, senior U.S. economist at NatWest Markets.

Powell would have to “soften” the rate-hike projection at his press conference.

That’s why Cummins thinks the Fed will somehow get to zero. Michael Feroli, chief U.S. economist at JPMorgan Chase agrees.

Will any Fed officials project rate cuts from current level?

The current Fed funds target rate is between 2.25% and 2.5%. In December, no officials projected rates below that level through 2021.

Kevin Logan, chief U.S. economist at HSBC, said it is very unlikely any FOMC members would forecast rate declines.

“If they projected lower interest rates were necessary, it would beg the questions why not lower interest rates today,” he said.

Investors think there is a greater chance the Fed will end up cutting rates over the next year than raising them, according to the CME Group’s FedWatch tool.

The yield on the 10-year Treasury note TMUBMUSD10Y, +0.00%   remains 60 basis points off its 52-week high hit last November.

Could the Fed blow up the dot plot?

Economists think even this is a possibility for next week.

“A case can be made for getting rid of it,” Logan of HSBC said.

The dot plot was useful when the path of interest rates was always assumed to be higher. It doesn’t work as well when the direction of the next move is uncertain, he noted.

Powell said last week he’s asked the FOMC’s communications subcommittee to look at the issue.

“I have asked the communications subcommittee of the FOMC to explore ways in which we can more effectively communicate about the role of the rate projections,” he said in a speech to the Stanford Institute for Economic Policy Research. He didn’t sound like he wanted to scrap the dot plot entirely.

See: Powell turns to impressionist art to show limits of the dot plot

Other Fed officials don’t seem to agree. Some view its as a “valuable component” to transparency while others were more critical, noting that the public has misinterpreted the median as representing a consensus view or a pre-set course.

Cleveland Fed President Loretta Mester said she thinks more should be attention should be paid to uncertainty bands. The Fed includes charts illustrating these bands with its dot-plot forecasts. The bands get wider as the projection horizon extends because the future is uncertain, Mester said. It’s a good reminder “that policy is not preset,” she said in a speech last month.