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Working Papers
Douglas Laxton, Hayk Avetisyan, Sopio Mkervalidze, Vazgen Poghosyan
Working Paper N2026-02
00:00 / 23:41
Abstract
Effective monetary policy communication requires more than publishing expected policy-rate paths. It requires communicating the conditional strategy, economic outlook, and risks that determine how policy will respond as conditions evolve. The Federal Reserve's Summary of Economic Projections (SEP) does not fully meet this objective. By publishing anonymous policy-rate projections without systematically communicating the scenarios and policy reasoning that generate them, the dot plot encourages markets to focus on expected policy instruments rather than the Committee's state-contingent policy strategy. This paper argues that three decades of inflation-targeting practice and developments in Forecasting and Policy Analysis Systems (FPAS) provide a better communication model. It proposes replacing the dot plot with a Committee-owned framework built around a Market Reference Scenario and a small number of alternative scenarios, each linking the economic outlook, principal risks, and expected policy response. By shifting communication from projected policy instruments toward conditional policy strategy, this approach would strengthen transparency, improve expectations formation, and provide a more coherent framework for conventional forward guidance.
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