Bloomberg getting dotty

This editorial from Bloomberg calls for the Fed ‘dot plots’ to go.

It notes that the dot plot does not contain individual FOMC members’ forecasts of what they think is going to happen to rates, noting disparagingly that instead, it merely plots what individual members would want to do with rates themselves if they were in sole control.

But what is so bad about that?  If I want to figure out how the FOMC itself is going to vote as a body over the future, I want to know what votes they would cast individually, at each point, on the assumption that the economy pans out as each thinks it will.

Charting what individual FOMC members forecast would happen to the collective vote would not nearly be as useful.  This would be a chart of what each FOMC member thought the current dot plot chart would look like, summarised in a line for their forecast for the winning vote.  We don’t really want to know everyone’s forecast of everyone else’s votes.  We want to know how each member plans to vote.   Far better to ask the voters themselves to declare how they intend to vote!  It’s not without good reason that political opinion polls spend more money asking people how they will vote than asking who they think will win [who they think everyone else will vote for, in other words].

Bloomberg chides the dot plot for begging to be misinterpreted as a commitment to a path for rates.  It might be.  But it doesn’t seem to be doing such a great job if Bloomberg itself realises that it is not a commitment.  In fact, I’d say the dot plot was in that case winning the battle, since it would surely be financial writers who are the most susceptible to getting this wrong.

Pulling back and concealing the forward-looking nature of monetary policy, keeping secret its plans, is giving up on a process of education about the reality and difficulties of modern central banking.  Taken to its limits, we would be left with the old early 20th century model of ‘don’t worry, the economy is safe in our hands’.

A more likely point of retreat would be the old system of arguing in the minutes over a verbally codified dot plot, crammed with rigid words like ‘measured, steady, neutral’.  The same as we have now, only more confusing, handing rents to the circle of Fedwatchers who can decipher the code.

This is not to say the dot plot is perfect.

As I wrote many times before, the Fed – like any central bank – ought to be able to agree a collective projection of interest rates too.  And they could do more to tease out the extent to which differences in the dots are due to different reaction functions, different views of the transmission mechanism, or different views of the state of the world.