January 4, 2012 / 12:17 AM / 7 years ago

Fed to publish rate path forecasts in transparency move

WASHINGTON (Reuters) - The Federal Reserve, in a move that could push back expectations of when near-zero U.S. interest rates will rise, will begin publishing its policymakers’ forecasts for borrowing costs.

The step is a significant milestone in Fed Chairman Ben Bernanke’s push for greater policymaking transparency, and it could offer the economy a bit more of a lift by better aligning financial market bets with the main view at the central bank.

The Fed has held the overnight federal funds rate close to zero since December 2008 and has bought $2.3 trillion in bonds in a further effort to stimulate growth. In statements after its last four policy meetings, it said it expected to keep rates ultra low until at least the middle of 2013.

But officials have chafed at a pledge that was tied to both the calendar and static. Fed Vice Chair Janet Yellen has indicated it no longer captured the U.S. central bank’s thinking.

In minutes from its December 13 meeting, released on Tuesday, the policy-setting Federal Open Market Committee said it will publish rate projections along with its regular quarterly economic forecasts after its next meeting on January 24-25.

It will also offer forecasts on the first rate hike.

“This step is arguably the greatest increase in transparency undertaken by the Bernanke Fed, and could represent his most lasting change to the way the FOMC conducts conventional interest rate policy,” said Michael Feroli, an economist at JPMorgan in New York.

Long-term interest rates, such as those on bonds and mortgages, encompass expectations for the short-term rates the Fed controls. By convincing financial markets it will keep rates on hold for longer than they already expect, the Fed could pull longer-term rates lower.

Michael Cloherty, head of U.S. interest rate strategy at RBC Capital Markets in New York, said he expected the new forecasts would show that the majority of Fed policymakers do not expect the next rate hike until 2014.


The minutes, however, showed the Fed was still engaged in an active debate on its easy monetary policy stance.

“A number of members indicated that current and prospective economic conditions could well warrant additional policy accommodation,” the minutes said.

A few others, however, believed further stimulus would be a bad idea.

Those differences highlight tensions at the Fed that were apparent during the course of last year, when officials dissented against policy decisions both because they were too aggressive in seeking to stimulate growth or not deemed assertive enough.

Economists at 11 of 17 of the financial companies that deal directly with the Fed believe the central bank will ease monetary policy further, either by buying mortgage-backed securities or Treasury debt.

At its December meeting, the Fed warned that turmoil from Europe’s debt crisis posed a major risk to the U.S. economy and it left the door open to further steps to boost growth, even as it noted a somewhat stronger labor market.

Even so, recent data from employment to manufacturing suggest the world’s largest economy has gained momentum. Analysts widely believe growth will top a 3 percent annual rate in the fourth quarter, which would be the fastest pace in 1-1/2 years.


The minutes showed many at the Fed think the recent economic acceleration will not persist and that the United States still faces a frustratingly slow slog back to economic health.

They also showed that most officials expected inflation to settle at or below desired levels.

Publishing rate forecasts is likely to cool any market anticipation that modest economic gains might mean a step by the Fed to tighten financial conditions could be drawing nearer.

“It does not mean the Fed must necessarily be more dovish,” said Eric Green, chief of U.S. rates research and strategy at TD Securities in New York.

“It will just break that way given the composition on the FOMC, what will be a more challenging environment in 2012, and an expectation that inflation is moving lower,” he said.

Two noted proponents of tighter policy just rotated off the voting ranks at the FOMC.

In publishing rate forecasts, the Fed is following the example of a number of other central banks, including those in Sweden and Norway, and taking a step toward the greater transparency that Bernanke had promised when he took office in 2006.

Bernanke has steadily moved an institution that once took pains to keep its decisions hidden from public view to one that has offered a window into more and more of its deliberations.

But that path has not been a straight one. The Fed only revealed the names of institutions that borrowed at its “discount window” during the financial crisis after ordered to do so by a judge.

Policymakers last month also considered adopting a statement of their longer-run goals and strategy, a step analysts said could incorporate a formal inflation target, a long-cherished policy goal of Bernanke’s.

However, it took no action and officials agreed to debate the subject further at their meeting later this month.

Reporting By Mark Felsenthal; Editing by Neil Stempleman, Tim Ahmann, Gary Crosse

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