The Fed Fails to Connect the Dots

Monetary policy works best when financial markets understand the central bank's intentions. That's the correct thinking behind the Federal Reserve's forward guidance -- and it's why one aspect of its approach needs to change.

The Fed regularly publishes a closely-watched "dot plot" of interest-rate projections. Even if correctly understood, this conveys little or no useful information. Usually, though, it's misunderstood. Tweaks have been suggested that could make the dot plot less confusing -- but the best thing would be to drop it altogether.