Update: Late Friday, the Fed revealed that some of the data in the confidential staff forecast was, in fact, not part of the confidential staff forecast. Here's the corrected information. Here's an updated story on what went wrong.
The Federal Reserve acknowledged Friday morning that it inadvertently published a confidential staff forecast prepared for a key meeting of its policy-setting committee in June. The documents include estimates for inflation, unemployment, economic growth … and the influential federal funds rate.
Currently, the fed funds rate is between 0 and 0.25 percent, the same level it has been since the financial crisis hit in 2008. Top Fed officials, including Chair Janet Yellen, have telegraphed for months that they expect to finally raise it by the end of the year. In the confidential forecast, staff estimated the fed funds rate would be 0.35 percent during the fourth quarter.
That tells us a few things. First, it virtually confirms that the Fed has no plans to raise interest rates when its policymakers meet in Washington next week. Of course, no one had really expected them to, despite Yellen’s testimony last week before Congress that “we could make decisions at any meeting.”
Second, the forecast bolsters the argument that the Fed's first rate hike will occur in September. The staff prediction is that the prevailing fed funds rate during the fourth quarter will be 0.35 percent. Though there is no reference to exactly when or how that could happen, analysts say the most likely way is for the central bank to raise its target rate in September. Some economists -- and even some Fed officials -- have argued for liftoff in December or later.
The Fed could raise its target rate in September and leave it unchanged for the rest of the year. Michael Purcell, a trader at Citi, argued the Fed could raise rates a second time in December and still average a 0.35 percent fed funds rate for the quarter. (The Fed is also slated to meet in October, but few expect it to raise its target rate at that meeting because there is no press conference scheduled afterward.)
Officially, the central bank has stated it believes the increase in the fed funds rate to more normal levels will be “gradual,” but there is plenty of room for discussion about what exactly that means. And the Fed’s policymakers are split over how high the target rate should go this year.
Officials’ public forecasts from June show that five believe the Fed should hike rates once this year, five think there should be two increases and five believe the central bank should be even more aggressive. The staff forecast is lower than officials’ median estimate of the fed funds rate.
Fourth, the confidential document is more optimistic about economic growth than official projections. The staff forecast the economy would expand by 2.31 percent this year, compared to an estimate of 1.8 to 2.0 percent by Fed officials. But staff predicted unemployment would level off at 5.3 percent, on the high side of officials’ expectations. Inflation is not expected to hit the Fed’s target of 2 percent until 2020, according to staff.
It’s important to point out some critical difference between forecasts from Fed officials and the confidential one from staff. When Fed officials publish their forecasts, it is a reflection of their own economic world view and incorporates how they believe monetary policy should respond. Those who believe the economy is nearing full employment might predict a higher fed funds rate to guard against inflation, for example. Those who think the recovery still needs support might predict a lower level for the fed funds rate.
In other words, forecasts from Fed officials are based on what they believe should happen. The confidential staff forecast, however, tries to anticipate the likely course of action. It’s not a recommendation for how policymakers should act, and staff forecasts have certainly been wrong. But the confidential document clues us in to the starting point for the discussion around the mahogany table at Fed policy meetings.
In a statement, the Fed said it has referred the breach to the central bank’s inspector general. The Fed is currently under investigation by the inspector general and the Justice Department over allegations that it leaked confidential information to Medley Global Advisors, a financial consulting firm.
The confidential data was posted online June 29 as part of a package of computer code for the Fed’s model of the U.S. economy that it makes publicly available. The central bank became aware of the breach earlier this week when the data was spotted by a staff economist. A Fed spokesperson said it is considering new procedures to better safeguard confidential information.
This story has been updated to more precisely characterize the nature of the Fed's staff forecasts.