MNI INTERVIEW: Warsh Could Overhaul SEP, Drop Dot Plot - Lewis

New Federal Reserve Chair Kevin Warsh is likely to launch a broad review of the Fed's communications framework -- potentially as early as next week -- that could culminate in significant changes including the elimination of the closely-watched dot plot of interest rate projections, Kurt Lewis, who served as a special adviser to outgoing chair Jerome Powell from 2023 to early 2026, told MNI. 

Warsh has discretion to push through substantial changes to Fed communications, and the committee would likely follow his lead, Lewis said in an interview. 

"I'm of the opinion that they're going to do a pretty significant review of what's gone on in terms of communications, including perhaps massive changes to the Summary of Economic Projections that could include dropping the dot plot," said Lewis, now head of central bank policy at Piper Sandler. (See: MNI INTERVIEW: Warsh Set To Dial Back Fed Guidance - Swanson)

Introduced in 2012, the dot plot shows where each Fed policymaker expects interest rates to be three years into the future, and a revised median projection is capable of moving markets. Internally, it has long been a subject of criticism, with some officials arguing that investors treat it as a firm commitment rather than a conditional forecast.  

Ahead of its launch, five of 17 FOMC members -- Elizabeth Duke, Jeffrey Lacker, Richard Fisher, Charles Plosser and Narayana Kocherlakota -- voiced opposition or caution regarding its publication, according to a transcript of the December 2011 FOMC meeting. 

"Having been on the inside, I know that there is a level of frustration with how things are interpreted, and at some point, you have to make the cost-benefit analysis on signal or noise," Lewis said.  

"Do people take this too literally as a commitment, instead of recognizing that it's just a forecast? Will it box people in, in terms of will they feel like it's tough for them to do something that was counter to the last dot that they put out? Those were all things that people raised in late 2011 and are still some of the main questions today."   

EVERYTHING ON THE TABLE

An overhaul of the inflation target or the Fed's monetary policy implementation framework and balance sheet would require votes and significant work across the FOMC, but Warsh would not need unanimity to enact change in Fed communications, Lewis said. 

The communications framework is an area where chairs have historically commanded more deference from the committee than on policy questions. "They understand his communications challenge is greater, and they want to support as clear communication as possible," he said.

The review could follow a similar path as in 2011, with a subcommittee of governors and regional bank presidents taking a holistic look at all communications practices over the better part of a year. 

"If they do a full communications review, everything will go back on the table," he said.   

The dot plot may be replaced with some other forecast, such as the staff's, an idea floated by Ben Bernanke in his communications review, but some of the same issues would arise, Lewis said. Markets might simply fixate on a staff projection in the same way they currently hang on policymakers' rate expectations.

Warsh's first press conference should offer a lot of clues as to his priorities as chair, Lewis said, adding he's watching for revisions to the chair's opening statement and the topics with which Warsh is eager to engage. 

"I believe that Warsh wants very much to be an effective Fed chair, and the organization is going to support that," he said. "That's the lens through which I'm viewing everything." (See: MNI POLICY: Warsh Could Reshape Fed On Rates, Communication)