Federal Reserve to indicate interest rate path

The unprecedented shift will bring its practices more in line with those of other central banks, including the Reserve Bank

January 04, 2012 10:02 pm | Updated July 25, 2016 06:48 pm IST - WASHINGTON:

The US Federal Reserve building in Washington, DC. File photo

The US Federal Reserve building in Washington, DC. File photo

The United States Federal Reserve will break with longstanding tradition to start announcing on a quarterly basis its forecasts for short-term interest rates and other indicators of economic conditions, the Fed announced this week.

In an unprecedented shift that will bring its practices more in line with those of other central banks including the Reserve Bank of India, the Fed revealed that during its Federal Open Market Committee (FOMC) discussions last month its members had noted that “Adding their projections of the target federal funds rate to the economic projections already provided in the Summary of Economic Projections (SEP) would help the public better understand the Committee's monetary policy decisions.”

Quarterly projections

While the Fed releases the SEP also on a quarterly basis, a greater level of economic uncertainty might have prompted its members to note that one way to enhance the clarity and transparency of its public communications would be by “incorporating information about [members'] projections of appropriate future monetary policy.”

However, it was clear that the move was adopted by the FOMC with some degree of caution and concern, in particular surrounding the question of misinterpretation of the Fed's projections by the public.

For example, the Fed statement on the discussion pointed out that one member had suggested that the economic projections would be more understandable if they were based on a common interest rate path, while another suggested that it would be preferable to publish a consensus policy projection of the entire Committee.

May confuse public

The FOMC said, “Some participants expressed concern that publishing information about participants' individual policy projections could confuse the public; for example, they saw an appreciable risk that the public could mistakenly interpret participants' projections of the target federal funds rate as signalling the Committee's intention to follow a specific policy path rather than as indicating members' conditional projections for the federal funds rate given their expectations regarding future economic developments.”

Possibly hinting that the Fed would also engage with public on more diverse platforms to communicate its thinking the FOMC report said that its members believed there would be “opportunities to explain their projections and policy views in speeches and other forms of communication.” Nonetheless, some participants did not see providing policy projections as a useful step at this time, it added.

The projection information will be put out starting this month, including specifically the members' projections of the appropriate level of the target federal funds rate in the fourth quarter of the current year and the next few calendar years, and over the longer run.

While the Fed intends to inform the public about current projections of the likely timing of the first increase in the target rate given their projections of future economic conditions, it will also draw attention to the FOMC's longer-run goals and policy strategy, it said.

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