Nineteen out of twenty, Chair Waller again failed to deliver the Fed dot plot “assignment”

Federal Reserve Chairman Walsh has refused for the second consecutive time to leave his own interest rate forecast on the dot plot, rendering the fate of this decade-old policy communication tool increasingly uncertain.

According to Wallstreet News, on September 16, the latest published dot plot again presented only 18 dots out of 19 seats, with the public widely believing that Walsh’s forecast was missing once again. This mirrors his approach during the June FOMC meeting, the first time he chaired such a meeting.

Previously, Walsh had made it clear that the dot plot “is of no benefit to policy implementation,” and revealed that the Federal Reserve is setting up a new committee specifically responsible for communications. The future of the dot plot will be subject to comprehensive review by this committee, a process that will also include press conferences, meeting minutes, and statement documents.

This statement comes as the Federal Reserve announced a 25 basis point rate hike. Walsh characterized this decision afterwards as “a sober, serious, and responsible decision.” As a result, the debate over whether the dot plot will remain has become a new focal point for markets examining the direction of the Fed’s policy transparency.

The dot plot is a scatter chart released four times a year by the Federal Reserve, used to show Fed officials’ forecasts of the federal funds rate—the short-term benchmark rate controlled by the Fed—for the future.

Up to 19 rate decision makers can participate, including the seven board members of the Federal Reserve and the presidents of the twelve regional Federal Reserve Banks.

Each participant places a dot for the end of each of the next three years and “longer run,” representing their view of the appropriate midpoint for the rate range. The market typically pays most attention to the median of the dots in the plot.

The dot plot originated at the end of 2011 when the Fed was considering how to guide markets through the gradual withdrawal from extraordinary easing measures implemented after the global financial crisis. Then-Chairman Bernanke and Vice Chair Yellen intended to use this tool to provide the market a glimpse into the Fed’s thinking beyond each individual decision.

Whenever the dot plot shifts visibly, it often sends a strong signal to investors, whether it be the continuation of a rate hike path or rising expectations for rate cuts. It also provides a measurement tool to help the market identify divisions within Fed officials and the deviation between the official stance and market pricing.

The dot plot has played a decisive role at some key moments in history. In June 2023, the Federal Reserve kept rates unchanged but the dot plot suggested there was still room for more hikes within the year, effectively dampening market optimism that the hiking cycle was over.

Controversy around the dot plot has been longstanding, with main criticisms as follows:

• First, the dot plot is not an official consensus forecast. Each official’s forecast may be based on entirely different economic models and assumptions, lacking methodological consistency;
• Second, the dot plot is anonymous, making it impossible for outsiders to know which official corresponds to which dot, thus limiting transparency;
• Third, of the 12 regional Federal Reserve presidents, only five have voting rights in the Federal Open Market Committee each year, raising doubts as to whether the points plotted by non-voting presidents accurately reflect committee policy intentions.

According to reports, Fed staff once discussed consolidating the dot plot into an official consensus forecast, but this was not implemented due to officials’ widely diverging positions.

On the issue of the dot plot, attitudes among Fed chairs have not been consistent.

Yellen, in her first press conference as chair in 2014, reminded the market:

The dot plot should not be regarded as “the main way in which the committee communicates policy signals to the public.”

However, in 2016, after the Fed reduced its projected rate hikes for the year from four to two, she cited changes in the dot plot to explain to the public how slower global growth and tighter credit conditions affected expectations.

Powell has generally downplayed the role of the dot plot during his tenure but used it in certain situations to manage market expectations.

Walsh's stance is more explicit. After the June FOMC meeting, he stated bluntly at the press conference:

I did not submit a dot. For me, this does not help with policy execution.

He also said a comprehensive review of the Fed’s communication methods, including the dot plot, is expected by year-end. This ongoing debate over policy transparency will continue to influence the market in the coming months.