By being more optimistic, Fed policy makers would encourage traders to move up their expectations for monetary tightening. That may weaken the effectiveness of using policy forecasts, like the 2014 plan, as stimulus. Bernanke has said that communications are among the main easing tools left after reducing the federal funds rate.
Bernanke’s view is “‘we’ve gone pretty far here with our verbal policy messages; we’re not about to upset this just because we have a little bit of good data,” Hooper said. “It’s going to take quite a few months of very good news, with the market moving well ahead of them,” before Bernanke will signal the exit is approaching.
Money-market-derivatives traders predict the Fed will lift its target rate for overnight loans between banks a year earlier than the late 2014 forecast. Forward markets for overnight index swaps, whose rates show what traders expect the federal-funds effective rate will average over the life of the contract, signal a quarter-percentage point advance around the October- November 2013 period, according to data compiled by Bloomberg as of March 23.
“Our ability to say with any precision what the date of liftoff will be is very limited,” Bullard said in the Bloomberg television interview. “Markets have to understand that. Policy makers have to understand that as well.”
Dudley stopped short of calling for additional stimulus from the Fed last week, saying “nothing has been decided” about more bond-buying.
“The market focuses on direction and growth rates” of the economy, while “the Fed focuses on levels,” such as unemployment, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “Year in and year out, that’s one of the most fundamental sources of miscommunication. The Fed cares about the gap.”
Continuing Housing Weakness
Dudley’s focus on weakness in the housing market was supported by data last week showing purchases of new homes unexpectedly fell in February for a second month. Sales dropped 1.6 percent to a 313,000 annual pace, the slowest since October, from a 318,000 rate in January that was weaker than previously reported, according to figures from the Commerce Department. The median estimate of 78 economists surveyed by Bloomberg News called for a 325,000 pace.
Bernanke shared Dudley’s concerns about the impact on consumers from higher energy prices when he spoke before the House Committee on Oversight and Government Reform March 21. Gasoline jumped to a 10-month high last week, with the price for April delivery at $3.3852 a gallon on the New York Mercantile Exchange March 23. Futures have climbed 26 percent this year.
“Higher energy prices would probably slow growth, at least in the short run,” Bernanke said. Rising fuel costs create “short-term inflation pressures, and moreover, they act as a tax on household purchasing power and reduce consumption spending, and that also is a drag on the economy.”
The Fed’s forecasts for growth still are above the average Wall Street prediction. Central bankers predicted in January that the U.S. economy would expand by 2.2 percent to 2.7 percent in 2012, compared with a median projection of 2.2 percent in a Bloomberg News survey of 70 economists from March 9 to March 13. The Fed will update its economic forecasts at its April meeting. The U.S. expanded 1.7 percent in 2011.
Expectations for additional stimulus have declined since the FOMC’s March meeting, when policy makers acknowledged the economy is improving. Forty-seven percent of investors in a Bank of America Corp. survey released March 20 predict no further asset purchases by the Fed, up from 36 percent in February.
While the odds of a third round of bond buying, or so- called quantitative easing, are declining, the Fed’s “pretty dim view of the economy” has kept the option alive, said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut.
“I don’t think they’ll do QE3, but I would readily acknowledge that it’s not entirely off the table,” said Stanley, who predicts the Fed will raise interest rates in mid-2013. “They view the risk of careening into deflation as so much more severe than overstaying their welcome, so they’re prepared to err in that direction.”