Fed’s Bullard Sees Some Risk Rate Forecasts Mislead Markets
January 19, 2012, 1:33 PM ESTBy Caroline Salas Gage and Vivien Lou Chen
(Updates with comments on forecasts starting in fifth paragraph.)
Jan. 13 (Bloomberg) -- Federal Reserve Bank of St. Louis President James Bullard said policy makers’ interest rate forecasts may be misinterpreted by markets as a commitment for the future path of policy.
“There is some risk of that,” Bullard said on a conference call with reporters today. “Although I think markets will soon discover that there’s one projection at some point in time, and if the economic situation changes dramatically,” then the forecasts will change, he said.
The Federal Open Market Committee will start announcing policy makers’ forecasts for their benchmark interest rate after their Jan. 24-25 meeting. Bullard said he supports the decision, which is the latest step in Chairman Ben S. Bernanke’s drive for greater openness.
Seventeen Fed officials -- 12 regional bank presidents, including Bullard, and five members of the Washington-based Board of Governors -- will make forecasts for the federal funds rate, the central bank’s benchmark interest rate. The Fed’s target for the rate has been held at between zero and 0.25 percent since December 2008.
“It’s not going to be perfect” because “you still have 17 possible paths,” Bullard said later in response to audience questions after a speech in St. Louis. “I think it will be a little bit helpful.”
Swedish Example
The 50-year-old official, who doesn’t vote on monetary policy this year, pointed to Sweden’s Riksbank as an example of a central bank that has deviated from its published interest- rate forecasts.
“The notion that this tells you a whole lot about what’s going to happen is not right,” Bullard said. “I’m open to considering other ways to communicate the same information,” such as releasing a quarterly inflation report, as the Bank of England does.
Federal Reserve Bank of Philadelphia President Charles Plosser also said this week that policy makers’ rate projections shouldn’t be viewed as a “commitment.” Plosser said they won’t reduce the central bank’s flexibility to alter its policies in part because they’re released every quarter.
The format for communicating the Fed’s goals is “open to some change going forward,” Bullard said. Last week, he said in a Bloomberg radio interview that “we are very close to having inflation targeting in the U.S.”
Bullard told reporters after the speech that he believes the central bank should “stand pat” on its current level of accommodation, given that economic “data has been strong in the last two months.”
--With assistance from Joe Whittington St. Louis. Editors: Gail DeGeorge, James Tyson
To contact the reporters on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net; Vivien Lou Chen in San Francisco at vchen1@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
