MNI: Goolsbee Criticizes Fed's Dot Plot For Lacking Context

Chicago Fed President Austan Goolsbee criticized the FOMC's quarterly dot plot projections in a speech Friday, saying that detaching members' interest-rate forecasts from their views of underlying economic conditions fails to paint a complete picture and can become "mostly just speculation."

It's better to create a matrix anonymously connecting each member's rate forecast to his or her economic predictions, he said in remarks prepared for a conference at the Hoover Institution at Stanford University.

"Without a connection of economic conditions to rate projections, the dot plot is just a collection of opinions without economic content. No wonder the press doesn’t ask about anything else," said Goolsbee, who joined the Fed in January 2023. "Our own major communications document implicitly tells them that the economic rationale isn’t needed. Just tell us “how many” and we’ll put them in a plot."

Goolsbee harkened back to his predecessor at the Chicago Fed Charles Evans for an example of how giving a "state dependent" rate forecast based on economic conditions can be more useful than a "time dependent" commitment. "Saying in 2011 that the Committee doesn’t expect to raise rates for two years is not as helpful as an Evans rule that it won’t consider moving until unemployment is below 6.5% as long as inflation is below 2.5%," Goolsbee said.

MANY VOICES

"In times of heightened uncertainty or unusual risks, the policy playbook can be complicated and requires more than just dots. And such times seem to happen with uncomfortably high frequency," he said.

The Fed's latest Summary of Economic Projections from March suggested three rate cuts this year, a view that hasn't held up very well. Chair Jerome Powell said Wednesday sticky inflation meant it would take longer before the Fed could be confident about cutting rates and some investors see no cuts at all in 2024. (See: MNI INTERVIEW2: Fed To Cut Once At Most This Year- Ghamami)

Only half of Fed watchers surveyed in 2020 by the Hutchins Center said they found the dot plot useful, Goolsbee noted. While some have argued that communicating even more of the views of FOMC officials could lead to cacophony, Goolsbee said that argument isn't convincing.

"My plea is that we try to push our communications and especially the SEP to better convey how we respond to economic conditions. This does mean a large number of voices," he said. The speech gave the usual disclaimer that he wasn't speaking for the FOMC and he didn't indicate what his colleagues think about his idea.