Bloomberg News

Fed’s 17 Rate Forecasts May Confuse More Than Clarify

April 24, 2012

The U.S. Federal Reserve building in Washington. Photographer: Andrew Harrer/Bloomberg

The U.S. Federal Reserve building in Washington. Photographer: Andrew Harrer/Bloomberg

The Federal Reserve tried to bring more clarity to policy making in January by releasing Fed officials’ forecasts for interest rates. Instead, it may be creating confusion.

Policy makers tomorrow will probably repeat their plan to keep the benchmark interest rate low at least through late 2014, economists say. At the same time, a Bloomberg News survey of economists this month predicted that the central bank will raise borrowing costs by June of that year.

One reason for the disconnect: Six policy makers in January forecast a rate increase before 2014, and others may join their ranks this week on signs the economy is improving. Yet the Federal Open Market Committee’s time horizon won’t shift because its most influential members -- including Chairman Ben S. Bernanke and Janet Yellen -- probably won’t change their view, said Michael Hanson, a former Fed economist.

“The markets run the risk of getting a head fake” from a chart the Fed will release showing policy maker’s forecasts as a series of dots, said Hanson, senior U.S. economist for Bank of America Corp. The central bank doesn’t reveal which official’s forecast is represented by each dot.

“Some dots on these charts matter more than others,” said Dana Saporta, U.S. economist at Credit Suisse Securities in New York. “The voting FOMC majority is still committed to the late 2014 language.”

Meeting Started Today

The FOMC, which began its meeting at 1 p.m. today in Washington, plans to release its policy statement at around 12:30 p.m. tomorrow. Its forecasts for interest rates, growth, inflation and unemployment are due at 2 p.m. tomorrow, and Bernanke will hold a press conference beginning at 2:15 p.m.

The Fed gives forecasts of all 17 participants of the FOMC. Yet in any given year, only 10 members, including all the governors, have a vote. Governors and New York Fed President William C. Dudley have a permanent vote, and presidents of the other regional Fed banks rotate.

All but one of the six officials favoring a rate increase before 2014 have voiced their view publicly. Of those five, only one -- Richmond Fed President Jeffrey Lacker -- is a voting member of the FOMC this year.

Minneapolis Fed President Narayana Kocherlakota said in an April 10 speech in Nicollet, Minnesota that “conditions will warrant raising rates sometime in 2013 or, possibly, late 2012.” Philadelphia’s Charles Plosser told reporters in Washington on March 29 that the central bank may need to raise interest rates as soon as the end of this year or early in 2013.

Tighten Policy

The St. Louis Fed’s James Bullard told reporters in Logan, Utah on April 16 that the Fed will probably need to tighten policy during “the last part of 2013.”

Richard Fisher of Dallas hasn’t given a date, saying it depends on the economy. He dissented twice last year against moves to push down long-term rates and to keep the benchmark borrowing cost near zero until at least mid-2013.

“If the data continue to improve, however gradually, the markets should begin preparing themselves for the good Dr. Fed to wean them from their dependency rather than administer further dosage” of monetary stimulus, Fisher said in a Dallas speech on March 5.

Lacker said the central bank will need to raise the benchmark rate next year. He cast the only dissent to the Fed’s March 13 statement that it would likely hold rates exceptionally low at least through late 2014.

Near Zero

By the process of elimination, all but one of the remaining FOMC participants, including all six who hold permanent votes, favor keeping the main interest rate near zero at least into 2014.

The officials with permanent FOMC votes include Bernanke; Fed Vice Chairman Yellen; and Governors Daniel Tarullo, Sarah Bloom Raskin, and Elizabeth Duke, as well as New York Fed President William C. Dudley. The other regional presidents with votes this year are Atlanta’s Dennis Lockhart; Cleveland’s Sandra Pianalto, San Francisco’s John Williams and Richmond’s Lacker.

“Most of the people who think the Fed’s going to move before 2014 aren’t voting,” said Joseph Lavorgna, chief U.S. economist in New York at Deutsche Bank AG in New York. “There’s consensus on the committee with the people who matter” to hold with the 2014 rate plan for now, he said.

Expectations for the first interest-rate increase were pushed back as Bernanke and Yellen gave speeches calling for caution on the economic outlook and as the Labor Department reported that employers in March added the fewest jobs since October.

Betting on Increase

Traders currently expect a fed funds rate of 0.5 percent by September of 2014. As recently as March 20, they were betting on an interest-rate increase in December 2013.

Benchmark 10-year Treasury yields have decreased to 1.96 percent as of 1:06 p.m. today in New York from 2.06 percent on Jan. 24, the day before the previous FOMC forecasts were released. The yield climbed to a four-month high of 2.39 percent on March 19. The Standard & Poor’s 500 Index has rallied 4.3 percent since Jan. 24 to 1,371.23 today.

Dudley said April 12 in Syracuse that he hasn’t “seen any set of information that should suggest to me we should change” the 2014 time horizon. Yellen said in an April 11 speech in New York that some economic models could warrant holding rates near zero into 2015.

Lockhart and Pianalto said this month the 2014 date aligns with their outlook. They have never dissented from a committee vote.

Dissented Twice

Chicago Fed President Charles Evans, who dissented twice from policy last year in favor of more accommodation, backs a later interest-rate increase, saying in a March 22 speech that “extending the time the FOMC keeps the federal funds rate at zero would bring policy closer to the optimum.”

The central bank during the second quarter of 2014 will probably raise its target interest rate to 0.75 percent from its current level near zero, according to the median forecast in a Bloomberg News survey of 43 economists taken April 6-11. The Fed will probably increase the rate again to 1 percent in the third quarter of 2014, the survey showed.

“I think they’ve just underestimated the strength of the economy,” said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, who forecasts the Fed will raise rates in the second half of 2013. “The Fed is notorious for their inability to forecast. Watch what those forecasts look like in six months if the economy has been growing at 3 percent.”

More Than Forecast

Consumer spending and service industries gained in March. Retail sales in the U.S. rose more than forecast last month as Americans snapped up everything from cars and furniture to clothes and electronics, with sales rising 0.8 percent in March and 1 percent in February.

Service industries in the U.S. grew in March, capping the strongest quarter in a year and indicating the world’s largest economy will keep generating jobs.

The Institute for Supply Management’s non-manufacturing index fell to 56 from a one-year high of 57.3 in February, the Tempe, Arizona-based group’s data showed April 4. Last month’s reading still topped the average for the previous economic expansion.

Other reports since the March 13 FOMC meeting signal the economy may lose momentum. Employers in the U.S. added 120,000 jobs last month, the least in five months. Housing starts dropped 5.8 percent to a 654,000 annual rate, the least since October and less than the lowest estimate of economists surveyed by Bloomberg.

Biggest Economy

The world’s largest economy probably expanded by 2.5 percent in the first quarter, according to the median of 53 estimates in a Bloomberg News survey before the Commerce Department report on April 27. That’s down from 3 percent growth in the fourth quarter of 2011.

“The U.S. economy is moving forward, but it does have its ups and downs,” said Jeffrey Joerres, chief executive of Manpower Inc., the largest U.S. provider of temporary staffing, in an April 20 earnings call. “Choppy growth is a little bit difficult on a day-to-day basis, but it is pointing in the right direction.”

To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net Jeff Kearns in Washington at jkearns3@bloomberg.net;

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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