Federal Reserve: The ‘Dots’ as Interest Rate Anchors

Federal Reserve: The interest rate projections (‘dots’) of the FOMC members represent a reference point that can help investors and economic agents in general in forming their own interest rate expectations This can be particularly welcome when the monetary environment is changing swiftly like has been the case over the past two years.

To explore this, a comparison has been made between the federal funds rate projections of the Survey of Market Participants (SMP) and those of the FOMC members. It seems that the dots may play a role in anchoring long-term interest rate expectations. The private sector forecasts closely follow the dots for 2023 and to a lesser extent for 2024, beyond which they are essentially stable. This is important considering that it might influence the pricing of bonds. Moreover, it seems that the early phase of the tightening cycle has seen higher interest rate volatility in the Eurozone than in the US. Both observations raise the question whether the ECB should start publishing the interest rate projections of its Governing Council members.

Transparent communication has become an integral part of central bank policy. Long gone are the days without press conferences or of statements that were very hard to grasp by non-experts. On the latter point, the Federal Reserve and the ECB have stepped up their efforts to communicate in ‘plain English’, avoiding technical language to make sure that all citizens understand what the central bank is doing.

This is instrumental in anchoring inflation expectations -an important intermediate objective of monetary policy- and enhances the effectiveness of monetary transmission. The publication of economic projections is part of this communication effort, yet there are important differences between central banks. The ECB publishes staff projections about important macroeconomic variables -though not on interest rates- whereas the Federal Reserve only publishes its staff projections with a 5-year delay[1]. On the other hand, four times per year it publishes the projections of the FOMC members -a document called Summary of Economic Projections (SEP)- on GDP growth, inflation, the unemployment rate and the federal funds rate. These projections are conditional forecasts because they are based on the assumed path for monetary policy.

The Federal Reserve is part of a small group of central banks that releases interest rate projections. These can be particularly welcome when the environment is changing swiftly. Over the past two years this has been the case with the huge and lasting increase in inflation that has obliged central banks to act forcefully. In such a context, the publication of central bank interest rate projections, by providing a reference point, can help investors and economic agents in general, in forming their own interest rate expectations.