Fed’s interest rate forecasts may confuse more than clarify

Near Zero

By the process of elimination, all but one of the remaining FOMC participants, including all six who hold permanent votes, favor keeping the main interest rate near zero at least into 2014.

The officials with permanent FOMC votes include Bernanke; Fed Vice Chairman Yellen; and Governors Daniel Tarullo, Sarah Bloom Raskin, and Elizabeth Duke, as well as New York Fed President William C. Dudley. The other regional presidents with votes this year are Atlanta’s Dennis Lockhart; Cleveland’s Sandra Pianalto, San Francisco’s John Williams and Richmond’s Lacker.

“Most of the people who think the Fed’s going to move before 2014 aren’t voting,” said Joseph Lavorgna, chief U.S. economist in New York at Deutsche Bank AG in New York. “There’s consensus on the committee with the people who matter” to hold with the 2014 rate plan for now, he said.

Expectations for the first interest-rate increase were pushed back as Bernanke and Yellen gave speeches calling for caution on the economic outlook and as the Labor Department reported that employers in March added the fewest jobs since October.

Betting on Increase

Traders currently expect a fed funds rate of 0.5 percent by September of 2014. As recently as March 20, they were betting on an interest-rate increase in December 2013.

Benchmark 10-year Treasury yields have decreased to 1.96 percent as of 1:06 p.m. today in New York from 2.06 percent on Jan. 24, the day before the previous FOMC forecasts were released. The yield climbed to a four-month high of 2.39 percent on March 19. The Standard & Poor’s 500 Index has rallied 4.3 percent since Jan. 24 to 1,371.23 today.

Dudley said April 12 in Syracuse that he hasn’t “seen any set of information that should suggest to me we should change” the 2014 time horizon. Yellen said in an April 11 speech in New York that some economic models could warrant holding rates near zero into 2015.

Lockhart and Pianalto said this month the 2014 date aligns with their outlook. They have never dissented from a committee vote.

Dissented Twice

Chicago Fed President Charles Evans, who dissented twice from policy last year in favor of more accommodation, backs a later interest-rate increase, saying in a March 22 speech that “extending the time the FOMC keeps the federal funds rate at zero would bring policy closer to the optimum.”

The central bank during the second quarter of 2014 will probably raise its target interest rate to 0.75 percent from its current level near zero, according to the median forecast in a Bloomberg News survey of 43 economists taken April 6-11. The Fed will probably increase the rate again to 1 percent in the third quarter of 2014, the survey showed.

“I think they’ve just underestimated the strength of the economy,” said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, who forecasts the Fed will raise rates in the second half of 2013. “The Fed is notorious for their inability to forecast. Watch what those forecasts look like in six months if the economy has been growing at 3 percent.”

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