In June, the FOMC also indicated that economic developments will likely warrant only gradual increases in the fed funds rate. Of course, the timing of those rate increases and the overall slope of that gradual path will depend on how the economy, the economic outlook, and the risks evolve.

Indeed, in the June projections, the median fed funds rate path of appropriate policy was somewhat shallower than in the last set of projections in March — partly reflecting somewhat slower growth projected for this year, and partly reflecting a lower estimate of the fed funds rate over the longer run.

[The dot plot] should always be, you know, four quarters ahead, eight quarters ahead, 12 quarters ahead, you know, that kind of thing. It shouldn’t be 2016, 2017, 2018. But it’s just kind of convention over the years that we’ve always done it that way. But the horizon then kind of changes over time as you go through the year. You know, the first part only has six months left or three months left.

Seven FOMC participants [in March] thought the federal funds rate at the end of this year should be higher than the median. As Fed speakers began talking after our April meeting, some news accounts suggested there had been a significant shift in Fed sentiment, as the commentary covering these speakers emphasized arguments for more aggressive tightening than that represented by the median. If you find this confusing, I have a simple piece of advice: Before you infer that the consensus has shifted so quickly, count to seven first!

Bullard told reporters before the speech that for the time being there is "obviously a pretty big gap" between the markets’ prediction for future rate rises and the Fed’s own and it was difficult to conclude who is more accurate.

While I believe that gradual federal funds rate increases are absolutely appropriate, I do not see that the risks are so elevated, nor the outlook so pessimistic, as to justify the exceptionally shallow interest rate path currently reflected in financial futures markets. The forecast for economic variables contained in the most recent Fed policymakers’ Summary of Economic Projections is consistent with my own estimate – GDP growth slightly above potential and a continued slow decline in the unemployment rate.

Furthermore, I would point out that the extremely shallow rate path reflected in the market for federal funds futures seems at odds with forecasts by private sector economists and by financial firms that serve as counterparties to the Federal Reserve (the so-called primary dealers), as well as my own forecast for the U.S. Economy. Most of these forecasts envision a much healthier U.S. economy than is implied by that unusually shallow path of the funds rate, and many of the major private forecasters expect short-term rates to rise more rapidly than implied by financial futures.

My own view, as I will discuss today, is that the medium-term U.S. outlook has not changed materially since December. If anything, inflation seems to be returning to our 2 percent goal somewhat more rapidly than expected. As a result, my sense is that the less leisurely but still gradual pace of target rate increases that FOMC participants submitted at year-end is still more likely to be appropriate.

My baseline outlook has real gross domestic product (GDP) growing at a moderate 2 to 2-1/2 percent annual rate in 2016.

I think people should learn to love the dot chart and pay attention to it.

Liesman: But the markets right now just pricing in one [hike in 2016], and it's consistently been below. The guidance seems to be, you know, you start a normalization process which makes people think that you're heading up towards something that's higher than zero and perhaps higher than the 37 base points where you are now but right now it seems like all bets are off that you could be in this permanent neutral here.

Evans: Well, so look, the dot charts give the current best assessment of what we think the economy is doing and the appropriate monetary policy. You're right. We've used the term "normalization, renormalization" to kick things off and eventually we certainly want to get the funds rate up to a normal level, that 3% 3.5% rate, but look I have got to tell you I thought the chair was terrific yesterday when she said, you know, the dots aren't set in stone. There's a lot of conditionality that will depend on how things play out. We did use this term normalization, I think that's still correct but that doesn't mean we're going to get there tomorrow.

The very shallow path [of rate hikes implied by the SEP] also reflects my view that the neutral level of the federal funds rate today is lower than its eventual long-run level. By some estimates, the equilibrium inflation-adjusted rate is currently near zero. The degree of accommodation in actual policy needs to be judged against this benchmark. So the 75 to 100 basis point range for the nominal fed funds rate in the median SEP forecast for the end of 2016 is not terribly far below neutral.

In comments to reporters Kaplan declined to rule out a rate increase at the Fed's next meeting on April 26-27.

"I would make the point generally, I think it is a good practice to assume that all eight Fed meetings are live," he said.

“The state of the U.S. economy as of the March 2016 FOMC meeting was arguably consistent with December 2015 SEP projections. Yet, the Committee did not increase the policy rate at the March meeting,” Bullard said. “This state of affairs might be viewed as ‘time inconsistent’ in the macroeconomics literature. Financial markets may have trouble interpreting Fed behavior in the future if this is the case.”

The state of the U.S. economy as of the March 2016 FOMC meeting was arguably consistent with December 2015 SEP projections. Yet, the Committee did not increase the policy rate at the March meeting. This state of affairs might be viewed as ‘time inconsistent’ in the macroeconomics literature. Financial markets may have trouble interpreting Fed behavior in the future if this is the case.

The Federal Open Market Committee kept interest rates unchanged last week and halved projections for how many times it would hike this year from four times in December after volatility in financial markets and weakening global growth clouded the U.S. economic outlook. Bullard argued that the forecasts, also referred to as the dot plot, contribute to uncertainty in financial markets.

“You really saw that over the first part of this year,” Bullard said, adding that he’s getting “increasingly concerned” about giving forward guidance through those projections. “I’ve even thought about dropping out unilaterally from the whole exercise.”
...
“I am not revealing my dot,” Bullard said. “I want to get out of the game of how many rate increases this year.”

I am not revealing my dot. I want to get out of the game of how many rate increases this year.

"I used to sort of look at these dots and think that they were a bit too restrictive for what I thought was appropriate," Evans said, referring to a chart of Fed officials' individual rate-hike forecasts, each represented by a dot. "I now think that those dots is really a pretty good setting" for monetary policy."

Much has been made of the implications of the 17 independent forecasts submitted by Committee participants, taken together. The number of interest-rate increases in 2016 implied by the median forecast drawn from participants' submissions was reduced from the December projection. In past communications, we emphasized that rates would likely rise gradually and, consequently, monetary policy would likely remain quite accommodative for some time. Now it appears the Committee has signaled an even more cautious and deliberate approach than that implied in December.

So what gives? Well, first, let me reemphasize a message frequently repeated in communications of the Committee. There is no pre-set path of policy decisions. There is no date-specific plan that the public could take as a committed course of action. Decisions to raise rates will be data-dependent. To my way of thinking, this means that at each decision point (each meeting), the Committee will reevaluate whether the real economy—the Main Street economy—remains on the assumed path to full employment and price stability. The Committee will consider information received since the last meeting and what that information implies for the outlook. And, importantly, the Committee will take account of the context of risks and uncertainties surrounding the outlook.

I would argue that the real economy—the Main Street economy—remains substantially on the path envisioned by Committee participants at the time of the liftoff decision in December. However, the context of risks and uncertainties has shifted somewhat. In my view, this explains the Committee's changed sentiment regarding the speed of normalization, the pace of rate increases.