The Fed’s new embrace of transparency could be an economic stimulus

The Federal Reserve has gotten a lot of flak as of late for its lack of transparency. Now the central bank has made a significant shift in disclosing more information, deciding to go further than ever in explaining its rationale for interest-rate changes and its policy path for the future. Beginning this month, the Fed will project how far into the future it expects to maintain rates at the current level and include more information about what’s prompted it to make such forecasts. But this isn’t just going to deliver transparency — it could also deliver a boost to the economy in 2012.
(REUTERS)

Traditionally, when the Fed makes an interest-rate announcement, it doesn’t indicate how long it expects rates to stay at that level, which creates some degree of uncertainty in the market. So if it quietly intends to keep rates low, some individuals or companies who would have invested will sit on their cash because they’re not sure the rates will be low. Now the Fed will include projections about the “expected target federal funds rate in the fourth quarter of the current year and the next few calendar years, and over the longer run,” according to notes from its Dec 13. meeting released by the Federal Open Market Committee on Tuesday. It will also include projections about “the likely timing of the first increase in the target rate given their projections of future economic conditions.” That will make it easier for those individuals and companies to make their investment decisions.

Last month, for example, the Fed decided to keep the federal funds rate at the rock-bottom low of 0 to ¼ percent. And the Fed now says that it expects that such low interest rates will continue “at least through mid-2013.” The central bank says that it’s made this policy change “to enhance the clarity and transparency of its public communications,” according to its Dec. 13 meeting notes. But the real impact of the new projections could be on the consumers and businesses who will now have a better idea of how long they have to take advantage of low interest rates, for example, providing greater certainty and perhaps a stimulus of sorts to the economy.