For the second consecutive meeting, Federal Reserve Chair Warsh has declined to submit his own rate prediction for the dot plot, casting fresh uncertainty over the fate of this policy communication tool that has been in use for over a decade.
According to reports, in the latest dot plot released on September 16, only 18 dots appeared across the 19 available seats, with market observers widely believing Warsh's projection was once again missing. This mirrors his approach during the June meeting, his first time chairing a policy session.
Warsh had previously stated clearly that the dot plot "does not aid in policy execution," and revealed that the Fed is in the process of establishing a new committee dedicated to communications matters. The future of the dot plot will be included in that committee's comprehensive review, which will also cover the press conference, meeting minutes, and statement documents.
These remarks came at a time when the Fed announced a 25-basis-point rate hike. In his post-meeting remarks, Warsh characterized the decision as "a sober, serious, and responsible one." The debate over whether to keep or abolish the dot plot has thus become a new focal point for the market's assessment of the Fed's transparency trajectory.
Understanding the dot plot
The dot plot is a scatter chart published four times a year by the Fed, designed to show officials' projections for the federal funds rate, the short-term benchmark interest rate the central bank controls.
Up to 19 rate decision-makers can participate, including the seven Board of Governors members and the 12 regional Reserve Bank presidents.
Each participant is asked to mark one dot for the end of each of the next three years and for the "longer run," indicating where they see the midpoint of the appropriate rate range. The market typically pays closest attention to the median trajectory of the dots.
The dot plot originated in late 2011, when the Fed was strategizing how to guide markets through the gradual withdrawal of the extraordinary easing measures adopted after the financial crisis. Then-Chair Ben Bernanke and Vice Chair Janet Yellen hoped this tool would give markets a glimpse into the Fed's policy thinking beyond the immediate decision.
When the dot plot shows a significant shift, it often sends a powerful signal to investors, whether about the continuation of rate hikes or growing expectations for cuts. It also provides a yardstick for the market to identify internal divisions among Fed officials and the gap between official stances and market pricing.
History is not short of moments when the dot plot played a pivotal role. In June 2023, the Fed held rates steady without a hike, but the dot plot indicated more room for increases later that year, effectively curbing overly optimistic market sentiment that the tightening cycle had ended.
Critics' concerns and differing stances among past chairs
The controversy surrounding the dot plot is long-standing, with criticism mainly focusing on the following points:
First, the dot plot is not an official consensus forecast; each official's projection may be based on entirely different economic models and assumptions, lacking methodological consistency. Second, the dot plot is anonymous, making it impossible for outsiders to know which dot belongs to which official, which limits its transparency. Third, of the 12 regional presidents, only five hold voting rights on the Federal Open Market Committee each year, raising questions about whether the dots from non-voting presidents truly reflect the committee's policy intentions.
According to reports, Fed staff have explored consolidating the dot plot into a single official consensus forecast, but the effort ultimately stalled due to the wide divergence in officials' positions.
Past chairs have taken varying stances on the dot plot issue.
At her first press conference as chair in 2014, Yellen cautioned the market that the dot plot should not be viewed as the "primary means by which the committee communicates policy signals to the public." Yet in 2016, after the Fed cut its projected rate hikes from four to two for that year, she cited changes in the dot plot to explain the impact of slowing global growth and tighter credit conditions on expectations.
During Powell's tenure as chair, he generally downplayed the role of the dot plot, though he did use it to manage market expectations in certain situations.
Warsh's position is more pronounced. At his press conference following the June meeting, he stated bluntly: "I did not submit a projection dot. For me, it doesn't help in policy execution." He also indicated that a comprehensive review of the Fed's communication methods is expected to be completed by year-end, with the dot plot as a component of that review. This debate over policy transparency is set to keep markets on edge in the months ahead.
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