Here's how the Fed should reveal its outlook for the economy

By Ellen Meade and Craig Torres

As Chairman Kevin Warsh looks to revamp the central bank's communication strategy, the dot plot is ripe for change

Federal Reserve Chairman Kevin Warsh has said he wants to change the central bank's communication strategy.

Federal Reserve Chairman Kevin Warsh has made it clear he wants to revamp the central bank's approach to communication. And as an external panel appointed by Warsh begins considering the best path forward, at least one area is ripe for change - the way the Fed communicates about the economic outlook.

The last time the Fed innovated in this area was more than a decade ago, when Chairman Ben Bernanke added an interest-rate forecast known as the "dot plot" to the quarterly Summary of Economic Projections (SEP) in 2012. The dot plot reveals individual Fed officials' interest-rate outlooks, but it was only the first draft of a project that was supposed to evolve into something more informative and better.

Now, the dot plot shows the policy-rate path that each individual policymaker thinks is the best monetary policy to achieve the Fed's goals of maximum employment and stable prices. Both the rate and economic forecasts are presented anonymously and are not linked together.

As a result, there is no single forecast similar to what other central banks publish. Instead, there are individual forecasts with no discernible connection between the rate forecast and economic outcomes. Investors choose to focus on the medians of the policymaker forecasts. Warsh himself doesn't participate in the SEP.

A fresh approach to the dot plot and the Fed's broader communication tools is overdue, and the timing is good as the central bank grapples with new and evolving challenges.

Globalization is unwinding, and competition over natural resources, trade routes and technology are taking its place. Persistent inflation has been a feature of this more conflictive global arena, and the Fed has missed its 2% inflation goal for more than five years. Their strategy of "looking through" tariff-related price increases and supply crimps, amid robust demand, is now questioned by Fed officials themselves.

Alongside this complexity, Warsh also appears to be looking to hone the Fed's strategy for communicating with the public. "Communications must be in service to the Fed's paramount responsibility: getting monetary policy right," he told the Jackson Hole, Wyo., meeting of central bankers in late August.

Well said - but it's not the whole story. Fed officials aren't elected; their power is delegated by Congress. They also have an obligation to tell the public what they are doing and why.

Making changes to the way the Fed lives up to this obligation can be tricky, due to the many stakeholders involved. One of us worked side-by-side with Fed officials for a number of years on ways to augment the dot plot. With 19 policymakers, it is difficult to make progress given diverse individual perspectives, strongly held views and the challenge of reforming such a complicated beast.

Given that Warsh doesn't participate in the dot plot, the task force may recommend abandoning it. What could replace it? Many central banks publish some sort of forecast that lays out what policymakers or the central bank's staff see as the most likely way the economy will evolve. An economic forecast tells a plausible story about the future and aids public communication.

But here's the rub: Any forecast embeds an underlying path for interest rates. How can the Fed provide forecasts to the public with Warsh dead set against providing forward guidance about interest rates?

At some central banks, policymakers agree to a path for interest rates that underlies the forecast. However, this approach fails Warsh's forward-guidance test. Some other central banks use a path for interest rates implied by financial-market prices. The market path is interesting because it is the basis for broader financial conditions; the Bank of England and European Central Bank use this approach. Former Bank of England Governor Mervyn King is one member of the Fed's communications task force.

Here is how it works: The central bank takes the policy-rate path implied by financial-market prices for the years of the forecast and generates outcomes for growth, employment and inflation. Policymakers have to decide whether the forecast comes from the policy committee or is done by the staff, and to what degree the forecast is based on judgment versus models.

Done this way, the forecast tells you whether the economy seems likely, under market-implied policy, to move toward or away from the central bank's goals, which in the Fed's case are stable prices and maximum employment.

Use of the market path accomplishes at least two things that are important to Warsh: It preserves market signals and it gets the Fed out of forward interest-rate guidance.

It's not a perfect solution, but neither is the dot plot. Here is one drawback: Market pricing, even if averaged over a week or two to smooth through daily ups and downs, can become outdated quickly - even by the time the forecast is released to the public.

But Warsh is concerned that markets fixate on the SEP's median dot and view the dots as a commitment, rather than a guess of what seems likely to occur. By the latter part of the year, like now, markets give the dots unusual weight. A central-bank forecast that embeds market pricing does not suffer from this commitment problem.

None of this addresses another communication issue that has received widespread attention: whether or how the Fed might generate alternative scenarios to illustrate key risks.

We don't know what the task force will recommend. But using a market path would address some of Warsh's criticisms of current communication. It would retire the dot plot and get the Fed out of signaling its next few moves, while also giving policymakers a common baseline to comment on.

Ellen Meade is research professor of economics at Duke University and a member of the Dallas Fed's Academic Advisory Council. She is a former Fed Board senior adviser. Craig Torres is editor in chief of the Andersen Institute for Finance and Economics.

-Ellen Meade -Craig Torres

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10-16-26 1307ET