WASHINGTON (Reuters) - The U.S. central bank’s commitment to deciding the path of rates based on incoming data will periodically “surprise” investors and traders, Federal Reserve Governor Jerome Powell said on Friday.
“A data-driven committee, making decisions meeting by meeting, is likely to surprise markets from time to time,” Powell said in prepared remarks to a monetary policy conference in New York.
Powell was speaking after five Wall Street and university economists published a paper to kick-off the event that urged the central bank to avoid time-based forward guidance except in rare circumstances and stress interest rate moves are based on very hard-to-predict economic data.
The Fed governor said that in reality it is “hard to avoid” a combination of time- and data-based guidance when communicating the path of policy.
He also said criticisms of the Fed policymakers’ individual quarterly projections for the path of rate rises, summarized in a chart known a dot plot, were fair because the lag on updating can make them quickly look out of touch.
Fed watchers take the median of these anonymized predictions to infer the Fed’s expectations. For example, in December the Fed’s median forecast was four quarter-point rate hikes this year.
But the divergence between Fed forecasts on rates and the financial market, which routinely predicts fewer increases, has caused some consternation among policymakers.
“Fan charts could help emphasize that the economic outlook is uncertain, and that consequently there is considerable uncertainty around the path of policy,” Powell said.
Minutes from the Fed’s last meeting in January showed officials were concerned investors were not embracing the central bank’s oft-repeated mantra that it is data dependent in deciding rates, but held off making changes to the dot plot pending further investigation.
The Fed is expected to downgrade forecasts for rate increases this year at its next policy meeting on March 15-16.
However, it will likely remain out of step with investors, who currently rule out any further increases this year.
Reporting by Lindsay Dunsmuir; Editing by Meredith Mazzilli