Federal Reserve will start disclosing officials’ quarterly projections

January 3, 2012

The Federal Reserve took another step in its gradual march toward greater openness by agreeing to disclose its board members’ expectations about future interest rates, according to newly released minutes of the Fed’s December meeting.

The measure is designed to increase certainty and predictability about the Fed’s current policy of low interest rates — and thus encourage economic activity among investors and consumers.

Every quarter, starting with the late January meeting, Fed officials on the Open Market Committee will disclose their own projections for the federal funds rate at which banks can borrow money over the next few years. The Fed committee members will also release their forecasts for the “likely timing” of the first increase in the federal funds target rate. And Fed officials will provide “qualitative information” about their expectations regarding the size of the Fed’s holdings of bonds and other securities, which the central bank has used to help stimulate the economy.

The moves are in line with other steps toward transparency promoted by Fed Chairman Ben S. Bernanke, such as the release of economic forecasts in 2007 and news conferences in 2011.

“This is the ultimate in central bank transparency,” said Laurence H. Meyer, a former Fed governor who is now at Macroeconomic Advisers, a consulting firm. “People will be able to adjust their own projections before the committee announces it. The markets do that today, but they’re going to be able to do it better.”

But the new Fed practice stops short of more-ambitious options, such as setting unemployment or inflation targets. Some analysts, meanwhile, complained that the new forecasts will be anonymous, making it difficult to figure out who at the Fed expects what.

“We unfortunately will only get a fairly opaque view of the Fed’s reaction function or, more realistically, only insight into the broad range of ‘appropriate’ reaction functions among members,” Bank of America Merrill Lynch economist Michael S. Hanson said in a note to clients. “Thus, the ability of this change to strongly signal the likely path for policy is limited.”

The new Fed policy came despite misgivings among some officials who preferred to publish a “common” or consensus view, the minutes said. Others worried that the new approach could “confuse the public” into mistaking projections for firm commitments. And “some” participants did not think the move would be a “useful step.” A “number” of Fed officials “suggested further enhancements.”

The Federal Reserve’s policy change was announced on the first trading day of the year. Markets bounced up more than 1.5 percent Tuesday on optimism fueled by favorable manufacturing news. A survey by the Institute for Supply Management released Tuesday showed U.S. manufacturing growing at the fastest pace in six months, while other reports showed factory output in Australia, China and Germany exceeding expectations. Construction spending also increased in November for the third time in four months.

The central bank board members said in December that they would keep the federal funds rate at which banks can borrow money between zero and a quarter of a percent through the middle of 2013. The minutes show that several members believed that the Fed might need to extend that assurance further because of continuing economic weakness.

The Federal Reserve Open Market Committee members said the economy was expanding moderately, with the financial disarray in Europe posing a threat to the health of the U.S. economy, according to the minutes.

The Fed’s economic staff lowered its medium-term forecast for economic growth because of the developments in Europe and said that unemployment would “remain elevated” through the end of 2013. Those factors were partly why some members wanted to see the Fed extend the assurance of low interest rates.

“A number of members indicated that current and prospective economic conditions could well warrant additional policy accommodation,” the minutes said, possibly signaling that the Fed might purchase more assets to smooth financial markets and keep borrowing rates low.

Citing weak figures for personal disposable income, weak housing markets, greater fiscal austerity by government, a slowdown abroad and consumers’ anxiety about the future, the board members saw little risk of inflation and little reason to alter current interest rates, the minutes said.

The Fed’s benchmark interest rate has been at or near zero since December 2008.

Several Fed governors said the recent strong pace of consumer spending might be the result of “pent-up demand” among consumers who had held back for much of the past three years. But they said that pace “might not be sustained” because of consumer pessimism, high debt levels and the ongoing adjustment to the loss of wealth over the past three to four years.

Steven Mufson covers the White House. Since joining The Post, he has covered economics, China, foreign policy and energy.
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