Fed's 'dot plot' looks increasingly out of touch on rates

By Ann Saphir
Reuters
Sunday, February 14, 2016

The Federal Reserve's rate path "dot plot" has become increasingly detached from financial markets' interest-rate projections and risks sending an overly hawkish message that may undermine the central bank's credibility.

Despite falling inflation expectations and turmoil in financial markets this week as concerns about growth mounted, the Fed hewed to its message that it could build on December's rate rise with further hikes in 2016.

Quite how many rises is unclear, and there is just one tool economists can use to get an idea: a chart in the Fed's quarterly "Summary of Economic Projections" known colloquially as the dot plot. The chart shows individual Federal Reserve rate setters' expectations, although they are not identified by name.

Both Fed Chair Janet Yellen and New York Fed Chief William Dudley suggested this week that rate rises were still on the cards, pointing to the underlying health of the U.S. economy.

Neither referred directly to the "dot plot" that envisages four rate hikes this year, versus market pricing of a one in three chance of even a single rate rise this year. Fed officials say that while the dots, issued every quarter, do not represent a rate path per se, they can be used to manage expectations.

"Part of the problem is that it is consistently wrong," said Tim Duy, an economics professor at the University of Oregon. "The second part of the problem is that the Fed doesn’t seem to recognize how terrible their forecasts have been." ...

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http://www.reuters.com/article/us-usa-fed-path-analysis-idUSKCN0VN0PU