Staff economists at the Federal Reserve Board seriously overestimate two important short-term interest rates in their forecasts, according to an internal staff memo at the Fed.
The memo was released to the public by consumer advocate Ralph Nader, who charged that the existence of the memo showed that Fed chairman Arthur F. Burns was "misleading Congress" when he said the agency does not make interest rate forecasts.
A spokesman for the Fed, which sets the nation's monetary policy, said Burns was not misleading anyone. There is an important difference, he said, between staff estimates and interest rate forecasts embraced by either the Fed itself or its Open Market Committee, which decides how the agency will conduct monetary policy through buying and selling government securities.
The internal Fed memorandum, which Nader sent to House Banking and Currency Committee chairman Henry S. Reuss, said that the staff projections of two key interest rates - the so-called federal funds rate and the rate on three-month Treasury bills - are sold for three months ahead.
But the farther in advance the staff tried to predict these rates, the more inaccurate the projections became. Market forecasts of interest rates - as reflected in the yields paid on Treasury bills bought and sold in forward markets - were much more accurate than the Fed staff over periods longer than three months.
According to the memo, "for longer forecast horizons, the market forecasts of both the funds rate and bill rates were substantially more accurate than the staffs." The Fed staff erred consistently on the high side.
However, the market forecasts also tended to "overpredict future interest rates," just not as badly as the Fed staff, the memo pointed out.
Reuss, in a response to Nader that he released to the press, did not indicate that he felt Burns was misleading Congress, as Nader charged, but he said the internal memo Nader provided was the kind of information the committee has tried, unsuccessfully, to obtain from the central bank.
"It would be desirable," Reuss said, "to have these issues presented to the committee by the Fed itself, where they could be discussed in context."
A spokesman for the Fed said that Burns has resisted supplying interest rate projections to Congress because such projections are inaccurate and because it might hamper staff members if they knew their work was to be published.
Nader, in his letter to Reuss, said that because of the overestimation of interest rates which come in part because the Fed staff is overestimating how much the economy will grow at a particular money supply, the "Federal Reserve may have pursued an overly restrictive monetary policy."
Reuss said he agree with Nader's contention that whatever the impact of the staff interest rate estimates might be on monetary policy, the Fed should "overcome its obsession with hiding from public view the difficulties inherent in the conduct of monetary policy."