The Federal Reserve's dots are making Mizuho Securities USA Inc.'s Steven Ricchiuto crazy.
For a while now, the Fed has included a "dot plot" with its quarterly economic updates. Each policy maker's estimate of where the Fed's benchmark interest rate will be at the end of the year is represented by a dot on a graph. The horizontal axis represents the years and the vertical axis represents the midpoint of the target range for the federal funds rates.
According to the latest estimates, which were released Wednesday, one of 17 members of the Federal Open Market Committee thinks the benchmark rate should rise this year. In 2015, one member sees the benchmark rate at almost 3 per cent, while two others think it should stay at zero. The median estimate for the Fed funds rate at the end of 2015 is 1.375 per cent, up from 1.13 per cent in June, when the Fed last updated its outlook.
How useful is this information? In Mr. Ricchiuto's opinion, it's not useful at all. That's because the faceless dots misconstrue the way policy is made at the Fed. Seventeen men and women submitted estimates this week, but only 10 of them actually had a vote on the final policy statement. And of those 10, the members of the Washington-based Federal Reserve Board tend to vote with their boss, Fed chair Janet Yellen. The president of Federal Reserve Bank of New York also is understood to carry more weight than his counterparts at other regional banks.
Given that context, is the median estimate for Fed funds rate released Wednesday really the median of the votes that count? The answer: There's no way to know for sure. When Ms. Yellen was asked to reveal which dot was hers, she declined, saying the committee had decided to withhold that information, at least for now. Yet none of this has stopped various Fed watchers from spending considerable time analyzing the dots. This is what is driving Mr. Ricchiuto crazy.
"As I have said repeatedly the median assumes all dots are equal and we should know they are not!" Mr. Ricchiuto, Mizuho's chief economist, bellowed in a short e-mail to his clients Wednesday afternoon.
The dots and the policy statement are disconnected. The latter was essentially unchanged from the assessment the FOMC released at its previous meeting in July. The message was clear: the Fed's leaders are no more inclined to raise interest rates than they were a couple of months ago. Yet the dot plot appears to suggest something else. The higher medians imply more officials are anxious to get started lifting the benchmark rate from zero.
Ms. Yellen on numerous occasions has all but begged market participants to resist reading too much into the dots. She did so again Wednesday. She stressed that the Fed is "data-dependent," the implication being that if investors want to project the path for interest rates, they should watch inflation and labour market indicators. The Fed chair noted that not only are dots nameless, they also provide no information about how confident each member is in his or her projection for interest rates. In other words, there's a degree of guesswork going on and therefor the dot plot should be assessed accordingly. "There's a lot of uncertainty around it," Ms. Yellen said at press conference.
U.S. stock markets had a good day Thursday, suggesting that most investors determined the Fed's message was that borrowing costs would remain ultralow for many months yet. So perhaps the only damage caused by the dot plot was to Mr. Ricchiuto's nerves. But he raises an excellent point. The dots were introduced after the financial crisis to help demystify the Fed. If all they do is obfuscate, then the Fed should consider becoming a little less transparent.