Turnover among Federal Reserve policy makers gives investors more reason to heed Chair Janet Yellen’s advice: don’t pay too much attention to officials’ interest-rate forecasts.
Two central bankers will leave the Fed this month, and three are poised to join before the June 17-18 meeting of the Federal Open Market Committee, when the next set of quarterly forecasts will be released. As a result, median projections for growth, unemployment and the benchmark interest rate could shift for reasons that have little do with the economic outlook.
Changes in the committee’s membership “may lead to a significant amount of uncertainty in markets as far as what the Fed’s going to do,” said David M. Jones, president of Denver-based economic consulting firm DMJ Advisors LLC and a former Fed economist who has written four books on the central bank. “It could lead to much greater financial instability than otherwise would be the case.”
Projections released March 19 showed policy makers saw the benchmark rate rising faster than they previously anticipated, prompting a jump in two-year Treasury yields. At a press conference the same day, Yellen played down the projections and sought to assure investors that rates are likely to remain low for a long time.
The forecasts of two policy makers will drop out of the reckoning. Governor Jeremy Stein will return to teaching at Harvard University in Cambridge, Massachusetts, and Cleveland Fed President Sandra Pianalto is retiring. She will be succeeded June 1 by Loretta Mester, the research director of the Philadelphia Fed since 2000. Pianalto and Stein have never dissented on an FOMC decision.
The Senate voted yesterday to confirm former Bank of Israel Governor Stanley Fischer to the Fed board, and it will vote “at some later time” on his nomination as vice chairman, according to Majority Leader Harry Reid, a Nevada Democrat.
Awaiting Senate action are the nominations of Lael Brainard, a former U.S. Treasury undersecretary for international affairs, and Jerome Powell, who is nominated for a full 14-year term on the Board of Governors after filling an unexpired term two years ago.
When those nominees are confirmed, the White House will still have two more governor seats to fill, potentially adding forecasts as early as September.
“We’re going to have new voices so you could see a lot more volatility with communications and more views,” said Kathy Jones, a New York-based fixed-income strategist at Charles Schwab Corp. (SCHW:US), the largest U.S. independent broker with $2.31 trillion in client assets.
Investor focus on the projections intensified after the Fed dropped a pledge to keep the benchmark rate low at least as long as unemployment exceeded 6.5 percent and the outlook for inflation was no higher than 2.5 percent.
The Fed made that decision after unemployment fell to 6.7 percent, even as other labor-market gauges showed continued weakness. The Fed in March said it would instead consider a “wide range of information” on jobs, consumer prices and financial markets in deciding how long to keep the rate near zero, where it has been since December 2008.
With the benchmark no longer tethered to specific economic milestones, investors shifted their attention to the officials’ projections for the federal funds rate, which reflects the price of overnight loans among banks.
At the March 19 press conference, her first as chair, Yellen warned against paying too much attention to the forecasts, which are displayed as a series of dots on a chart. She said the Fed’s policy statement, which emphasized keeping rates low, takes precedence.
“One should not look to the dot-plot, so to speak, as the primary way in which the committee wants to or is speaking about policies to the public at large,” Yellen said.
Donald Kohn, a former Fed vice chairman, said the forecasts could change because some members are leaving, and not necessarily because the remaining members have altered their views. The forecasts of individual members aren’t identified.
“It’ll be harder as people drop out since we don’t know whose dot is whose,” said Kohn, a senior fellow at the Brookings Institution in Washington who also sits on the Bank of England’s Financial Policy Committee. “The median dot could move not because anyone changed their mind but because the people reporting changed.”
Another hurdle for investors seeking to divine how soon rates will rise: There’s no way to know which forecasts belong to voting members of the FOMC. The Fed’s seven Washington-based board members and the president of the New York Fed have permanent votes, while presidents of the other 11 regional Fed banks rotate.
The median projection in March showed officials expecting the fed funds rate to rise to 1 percent at the end of 2015 and 2.25 percent a year later. In December, the projection was 0.75 percent at the end of next year and 1.75 percent by the end of 2016.
It’s possible that the median won’t change, because new members don’t necessarily bring different viewpoints. What’s more, the chair shapes the debate at FOMC meetings by deciding which policy options will be presented to the rest of the committee by the staff economists.
“The new people who are not yet confirmed probably would be solidly in the Yellen camp, which has been the mainstream of the FOMC for a long time,” said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington and a former Fed economist.
Fischer, nominated by President Barack Obama at Yellen’s urging, formerly was World Bank chief economist and No. 2 International Monetary Fund official. His views are unlikely to diverge much from Yellen’s, according to Peter Hooper, chief economist at Deutsche Bank AG in New York.
Fischer said at his confirmation hearing before the Senate Banking Committee in March that the economy “requires the continuation of an expansionary monetary policy” because joblessness remains elevated. It was 6.3 percent last month, down from 6.7 percent in March and February.
“There isn’t really much room for disagreement about the current stance of policy given that the inflation picture remains as subdued as it is,” said Hooper, who was a Fed board economist for 26 years. “I think of Stan Fischer as someone who is going to have an approach to policy and an analytical framework that’s pretty well in tune with Janet Yellen.”
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