Dudley Plays Down Significance of Fed’s Rate Forecasts

A top Federal Reserve official counseled investors against putting too much emphasis on the central bank’s projections for the benchmark interest rate.

“People shouldn’t overweight the value of those dots, especially as you get out further in terms of the time horizon,” William C. Dudley, president of the Federal Reserve Bank of New York, said in an interview with Matthew Winkler, editor-in-chief of Bloomberg News.

The Fed publishes officials’ quarterly estimates for the federal funds rate, which are displayed as dots on a chart. The estimates are anonymous, so investors don’t know which forecasts belong to voting members of the policy-setting Federal Open Market Committee.

Dudley, speaking today at the Bloomberg Markets Most Influential Summit in New York, said it’s important not to ignore the uncertainty surrounding the projections.

“I have a dot for 2015, 2016 and 2017,” Dudley said. “But if I told you what my confidence interval around that dot was, you would probably not put a lot of weight on where that dot is precisely located.”

Fed Chair Janet Yellen said during a press conference last week that the projections for interest rates would be reviewed by a Fed subcommittee on communications being led by Vice Chairman Stanley Fischer.

The latest projections, released last week, traced a steeper median path for increases in the federal funds rate compared with projections released in June.

Meeting Minutes

One area that might be studied by Fischer’s panel was suggested by the minutes of the FOMC’s December 2013 meeting.

A few participants at that gathering discussed using just the median of the projections of the federal funds rate “as a means of communicating the likely path of short-term interest rates.”

Dudley cautioned that the communications review is unlikely to deliver big changes, saying that if it had been obvious how to do a better job, the Fed would already have taken those steps.

“But if we can find ways to improve the communication process then certainly we will go forward with that,” he said.

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