FOMC Scorecard: Dotplot-Dependent 1, Data-Dependent 0

Chief Economist Eugenio J. Alemán discusses current economic conditions.

The question many economists, as well as market participants, asked themselves after the June Federal Open Market Committee (FOMC) meeting was why the Federal Reserve (Fed) paused its federal fund's rate hike campaign if they were going to increase it again in July anyway. What did waiting for 5 weeks to resume hikes mean for monetary policy? We thought, naively, that it was because the Fed, as it has argued so many times, was data-dependent and was willing to wait some more time to see how the lagging effects of monetary policy were affecting the economy.

This brings us to an anecdote from a personal experience of Fed policymaking. Regional Federal Reserve banks schedule meetings with business representatives in their districts to produce the Beige Book, which is published 8 times per year. During our careers as economists, we participated in several of those meetings as one of the representatives from the financial industry. We remember that during one of those meetings, the ‘dot plot’ discussion came into a big disagreement, with Fed representatives arguing that the ‘dot plot’ was not a forecast of the path of the federal funds rate. Conversely, many industry representatives argued that it actually looked like a forecast. In the end, Fed representatives had the upper hand because they were the ‘owners’ of the ‘dot plot’ and we finally adopted their position that it wasn’t an actual forecast on the path of the federal funds rate. This remained relatively true until Wednesday, July 26, 2023, when we finally had the opportunity to prove them wrong.

In fact, on Wednesday, July 26, 2023, the dot plot seemed to actually be a forecast for the future path of the federal funds rate. Even in the face of very good data on inflation and even in terms of employment, the Fed disregarded the data and moved to increase the federal funds rate after pausing for just one month. This makes the odd decision in June even odder and will probably remain one of the most intriguing and unsolved mysteries of monetary policy for all of the 21st century! The decision was so odd that even Chairman Powell had trouble explaining it during his press conference after the July FOMC meeting.

Since this is the case, we have updated our expectation on the federal funds rate and now expect another 25 basis point increase before the end of this year. The reason? This is what the dot plot showed in June. That said, this may change in September when the next FOMC meeting is scheduled and when the new Summary of Economic Projections (SEP), which includes a new dot plot, is going to be released. At that time, we will have to update our expectations regarding the federal funds rate matching what the dot plot shows.

Federal Funds Target Rate