Fed’s interest rate forecasts may confuse more than clarify

Federal Reserve Federal Reserve

April 24 (Bloomberg) -- The Federal Reserve tried to bring more clarity to policy making in January by releasing Fed officials’ forecasts for interest rates. Instead, it may be creating confusion.

Policy makers tomorrow will probably repeat their plan to keep the benchmark interest rate low at least through late 2014, economists say. At the same time, a Bloomberg News survey of economists this month predicted that the central bank will raise borrowing costs by June of that year.

One reason for the disconnect: Six policy makers in January forecast a rate increase before 2014, and others may join their ranks this week on signs the economy is improving. Yet the Federal Open Market Committee’s time horizon won’t shift because its most influential members -- including Chairman Ben S. Bernanke and Janet Yellen -- probably won’t change their view, said Michael Hanson, a former Fed economist.

“The markets run the risk of getting a head fake” from a chart the Fed will release showing policy maker’s forecasts as a series of dots, said Hanson, senior U.S. economist for Bank of America Corp. The central bank doesn’t reveal which official’s forecast is represented by each dot.

“Some dots on these charts matter more than others,” said Dana Saporta, U.S. economist at Credit Suisse Securities in New York. “The voting FOMC majority is still committed to the late 2014 language.”

Meeting Started Today

The FOMC, which began its meeting at 1 p.m. today in Washington, plans to release its policy statement at around 12:30 p.m. tomorrow. Its forecasts for interest rates, growth, inflation and unemployment are due at 2 p.m. tomorrow, and Bernanke will hold a press conference beginning at 2:15 p.m.

The Fed gives forecasts of all 17 participants of the FOMC. Yet in any given year, only 10 members, including all the governors, have a vote. Governors and New York Fed President William C. Dudley have a permanent vote, and presidents of the other regional Fed banks rotate.

All but one of the six officials favoring a rate increase before 2014 have voiced their view publicly. Of those five, only one -- Richmond Fed President Jeffrey Lacker -- is a voting member of the FOMC this year.

Minneapolis Fed President Narayana Kocherlakota said in an April 10 speech in Nicollet, Minnesota that “conditions will warrant raising rates sometime in 2013 or, possibly, late 2012.” Philadelphia’s Charles Plosser told reporters in Washington on March 29 that the central bank may need to raise interest rates as soon as the end of this year or early in 2013.

Tighten Policy

The St. Louis Fed’s James Bullard told reporters in Logan, Utah on April 16 that the Fed will probably need to tighten policy during “the last part of 2013.”

Richard Fisher of Dallas hasn’t given a date, saying it depends on the economy. He dissented twice last year against moves to push down long-term rates and to keep the benchmark borrowing cost near zero until at least mid-2013.

“If the data continue to improve, however gradually, the markets should begin preparing themselves for the good Dr. Fed to wean them from their dependency rather than administer further dosage” of monetary stimulus, Fisher said in a Dallas speech on March 5.

Lacker said the central bank will need to raise the benchmark rate next year. He cast the only dissent to the Fed’s March 13 statement that it would likely hold rates exceptionally low at least through late 2014.

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