By Nick Timiraos 

Federal Reserve officials are moving into unfamiliar territory with their dots.

So far, policy makers have used their so-called dot plot only to signal the anticipated path of interest rate increases. This week, the question is whether they will do the reverse.

Every quarter, the central bank produces a chart of the policy makers' individual expectations for the trajectory of their benchmark interest rate over the next few years.

Each dot represents one person's expected value of the federal-funds rate at the end of the current year, at the end of the next year and so on for a few years, under "appropriate" monetary policy. That is, each official is indicating where they think the rate should land, not predicting what their colleagues will vote to do.

The most recent dot plot, released in March, for example, showed 11 of the 17 officials -- five Fed board governors and 12 regional Fed bank presidents -- expected the fed-funds rate to remain unchanged through 2019 in a range between 2.25% and 2.5%. Four of them thought the rate would rise by a quarter percentage point by year's end and two expected it would be a half point higher.

Wall Street investors scour this matrix for signs of how the policy makers' thinking on rates is evolving.

The updated dot plot to be released Wednesday after a two-day Fed policy meeting will be the first to come at a time when many market participants and economists expect the Fed's next move will be to cut rather than raise interest rates.

When the Fed introduced the device in 2012, the fed-funds rate was near zero, and many officials expected it would stay there for months or years.

The tool helped to convince investors that interest rates would stay lower for much longer than previously anticipated, well after economic growth had picked up and unemployment began to decline.

When the Fed began slowly lifting the benchmark rate in 2015, the chart similarly helped set expectations of a gradual path of increases.

Two potential communications hazards lurk for Fed officials in the coming projections.

First, the economic outlook is becoming harder to forecast due to escalating trade tensions. Officials' individual rate projections correspond to the economic outlook they each regard as most likely, and markets look at the median projection as a rough proxy for the center of the rate-setting Federal Open Market Committee.

Rising trade tensions raise the prospect of two different outlooks. In one, the frictions are eventually resolved, leading to less of a drag on business investment and growth. In the other, the disputes worsen, creating bigger problems for the economy. The dot plot doesn't neatly provide a way to differentiate between these two possible scenarios.

Fed Chairman Jerome Powell pre-emptively addressed this potential confusion in a speech earlier this month. "Unfortunately, at times the dot plot has distracted attention from the more important topic of how the FOMC will react to unexpected outcomes," he said. "In times of high uncertainty, the median dot might best be thought of as the 'least unlikely' outcome."

Mr. Powell played down the projections by emphasizing how during periods of high uncertainty, the most important policy message from the central bank is how it responds to the unexpected, rather than what it will do if there are no surprises.

Also, it's unclear if most officials will feel comfortable projecting rate cuts at some point in the future if they don't lower rates at this week's meeting.

"It's hard because it raises the question, 'If you think cuts are going to be appropriate policy to meet your mandate, then why aren't you just cutting?'" said Julia Coronado, founder of economic advisory firm MacroPolicy Perspectives.

The risk is that because bond markets already expect the Fed to make at least two quarter-percentage point cuts this year, a dot plot that doesn't project cuts could provoke a sharply negative investor reaction. That could put more pressure on Mr. Powell, at his postmeeting press conference, to assuage market concerns about the Fed's willingness to react to an economic slowdown.

"The risk for him is he just walks in and gets hammered by the questions for an hour" to reconcile differences between market projections and officials' projections in the dot plot, said Ms. Coronado.

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

June 17, 2019 05:44 ET (09:44 GMT)