Powell In 2014: The Dot Plot Is A Lot Like Chernobyl

On page 78 of the newly-released transcript from the March 18-19, 2014, Fed meeting, Janet Yellen turns to Jerome Powell, the man who, unbeknownst to everyone in the room at the time, will replace her at the helm four years later at the behest of President Donald Trump.

“Thank you. Governor Powell”.

“Thank you, Madam Chair.”, Powell says, before delivering his forecast for the rate path.

He then launches into a critique of what he calls “the SEP issue”.

It’s a highly amusing anecdote from the thousands one might find buried in the detailed, verbatim accounts of the 2014 meetings, published by the Fed on Friday.

Powell has spent quite a bit of time over the past two years emphasizing that market participants shouldn’t put too much stock (figuratively and especially not literally) in the dot plot. Now we know that on at least one occasion, he compared the SEP to Chernobyl.

“I’m going to devote the bulk of my remarks to the issue of labor market slack, as several others have. But, first, I’m going to briefly revisit the SEP issue because I’m sitting here feeling as though we didn’t quite get to the heart of it in our earlier discussions”, Powell says. Here’s what he told his colleagues next:

The 50 basis point change in our SEP for 2016, in the face of a downbeat paragraph 1 in the statement and market expectations of no change at all, is going to be very hard to explain–more specifically, very hard for you to explain. [Laughter] There are three possible explanations, and this is about the disagreement between the new SEP and the expectation of the market. The first is that we think the economy is better than the market thinks it is. I don’t think that’s right.

The second is that the market misunderstood our reaction function and has new learning to do on that subject. First, I don’t think that’s true, but, second, we’re at the beginning of the normalization process. It’s going really well. The single worst thing we could do is to send a confusing signal about our reaction function. So that’s not an answer we want to provide, and, again, I don’t think it’s true.

The third explanation is that the market doesn’t really understand how the SEP works and how it gets put together, and I think that’s where the truth is. Specifically, what I’m hearing is that–I’m not sure everyone around the room is aware of this–25 of the basis points are due to what we euphemistically refer to as a change in personnel on the Committee since December. Another 25 basis points are due to the fact that 13 of the 16 members who are in the room now have an increase of 25 basis points or less. Somehow that works out to be an increase of 50 basis points in a world in which people are going to rip to that page of the SEP, look at the dots, and, in the 30 minutes between the time when the statement goes out and the time when you walk in front of the cameras, some of them are going to land on the second explanation. Even if they don’t this time, they will some other time.

This is probably stretching a metaphor too far, but it’s like the scene of a nuclear plant that’s blown up, and a series of engineers are all saying, “We did the right thing. We did exactly what we were supposed to do. It was right here in the book.” 

However accurate, that’s probably as good an argument as any for not releasing meeting transcripts.

Daniel Tarullo chimed in: “That is probably not the best metaphor”.

No, probably not.

Looks like Powell’s colleagues knew something about the perils of “plain English” five years before “long way from neutral” sent markets into a tailspin.

Narayana Kocherlakota was charitable. “I guess you’ve been watching too many episodes of The Simpsons“, he told Powell.

According to the transcript, everyone laughed.