Jerome Powell Explores Changes to Fed’s Interest Rate Predictions

Federal Reserve Chair Jerome Powell recently talked about possible changes to the Fed’s interest rate predictions during a conference in New York. These predictions are part of a larger review of the Fed’s policies that will be finished by the end of summer.

Powell mentioned that the Fed will closely look at how it shares information after meetings, especially its Summary of Economic Projections (SEP). This report shows what the Fed’s policymakers think will happen with the economy, unemployment, inflation, and interest rates in the next few years. Each policy maker’s rate idea is shown as a dot on a chart, which many economists and markets use to guess the Fed’s future actions on rates.

Supporters of the dot plot believe it makes it easier to understand monetary policy. They think that after the global financial crisis, the dot plot helped show that the Fed expected to keep rates at zero for a long time. However, it’s important to stress that the dot plot isn’t a firm promise about future rates; it’s just a mix of opinions from different policymakers.

Historically, the dot plot has not always predicted actual rate changes well because the economy often behaves differently than expected. For example, at the end of 2021, the dot plot suggested rates would stay below 1% at the end of 2022. But instead, the Fed raised rates to between 4.25% and 4.50% to deal with rising inflation.

Over the years, many have suggested ways to improve the dot plot. Former Fed Vice Chair Don Kohn said that the median projection doesn’t show the uncertainty and different possible outcomes. He proposed that the Fed also share the economic reasons behind each policymaker’s rate opinion to help people understand why the Fed makes its decisions.

Looking at how other central banks work could provide new ideas. For instance, the European Central Bank gives regular updates on inflation that help shape expectations about future rates. The Reserve Bank of New Zealand and others share inflation forecasts and their policy rate paths. The Bank of England even shows possible future inflation and growth paths in a fan chart, something that former Fed Chair Ben Bernanke recommended they change to provide better alternative scenarios.