US Fed chair Jerome Powell signals rate pause over tariff-led economic uncertainty, ‘dot plot’ tweak likely ahead

US Federal Reserve Chair Jerome Powell signaled potential changes for the US Fed's closely watched "dot plot" interest-rate projections as part of a policy framework review underway at the US central bank and expected to wrap up by the end of summer. Powell said that the US Federal Reserve is likely to keep its benchmark interest rate unchanged in the coming months as it waits for widespread uncertainty stemming from President Donald Trump's policies.

"On the communications...particularly our post-meeting communications, we're going to take a close look at the SEP and also compare ourselves to what other central banks around the world do," Jerome Powell said at a research conference in New York, referring to the US Fed's summary of economic projections.

US Fed chair Powell said the Trump administration is making policy changes in several areas, including trade, taxes, government spending, immigration and regulation, and added that the “net effect” of those changes are what will matter for the US economy and the US Fed's interest rate policies.

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US Fed chair Powell on rate cuts, dot plot projections

“While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their likely effects remains high,” said Fed's Powell. “As we parse the incoming information, we are focused on separating the signal from the noise as the outlook evolves. We do not need to be in a hurry, and are well positioned to wait for greater clarity.” 

That is the US Fed's quarterly report on what each of its 19 policymakers expect for economic growth, the unemployment rate, inflation, and the US Fed's own policy rate over the next several years. Individual policy-rate projections are plotted as dots on page 4 of the report, published at the end of the Fed's rate setting meetings each March, June, September and December. Economists use those dots as a guide to what the US Fed sees as most likely to do on rates.

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Supporters of the dot plot say it can make monetary policy more effective, noting that in the wake of the global financial crisis the US Fed's dot plot underscored U.S. central bankers' expectation they would be keeping rates at zero for much longer than markets might have otherwise expected.

And, they note, it can be helpful as a rough directional guidepost, even if it -- as Fed policymakers and Jerome Powell himself often emphasize -- is not a promise or even an agreed-upon forecast, but rather a collection of sometimes disparate views on how the economy, and policy, will play out.

At the end of 2021, for instance, the dot plot pointed to an end-2022 policy rate of less than one per cent. In fact, the central bank had raised rates to 4.25-4.50 per cent, a response to the realization that building inflation in the US was not going to recede without an aggressive Fed rate-hike campaign.

Over the years, US Fed policymakers and economists have made a range of suggestions about how to improve the dot plot, which has been published in its current form since well before Powell became the US Fed chairman in 2018.

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At the research conference Friday, former Fed Vice Chair Don Kohn noted that the median of the 19 projections does not capture the uncertainty and the various alternative scenarios that may be nearly as plausible. He suggested the Fed show what economic assumptions underlie each individual policymaker's view of appropriate policy, which would allow analysts to better understand the Fed's reaction function. A review of other global central banks' approaches could raise other possibilities. The European Central Bank, for instance, issues a regular staff forecast on inflation that helps guide rate-path expectations.