FOMC To Put Mbrs’ FFR Projections In S-E-P Starting in Jan

Author: Market News International | Category: News

By Steven K. Beckner

(MNI) – When the Federal Open Market Committee releases its
quarterly, three-year economic forecast later this month, it will
include a new twist — FOMC members’ projections for the path of the
federal funds rate.

Minutes of the Dec. 13 FOMC meeting confirm that the Federal
Reserve’s policymaking body decided to proceed with that change in
communications policy starting with the January meeting. Other
communications strategy changes could come later, the minutes suggest.

The minutes also reveal that there were those who sympathized with
Chicago Federal Reserve Bank President Charles Evans, who dissented in
favor of more policy accommodation at the December meeting.

At the Jan. 24-25 FOMC meeting time, Federal Reserve Bank
presidents and Fed governors will be putting together what is known as
the Summary of Economic Projections or SEP for the next three years and
for “the longer run.” This time, in addition to projections of GDP,
unemployment and inflation, the SEP will include members’ projections of
the federal funds rate, as MNI anticipated the FOMC might do in early

The FOMC did not decide on Dec. 13 to change its so-called “forward
guidance” language in its policy statement, keeping its declaration that
the funds rate was expected to stay in the zero to 25 basis point range
“at least through mid-2013.”

However, the minutes suggest that phraseology’s days may be
numbered. “Several members noted that the reference to mid-2013 might
need to be adjusted before long,” they say, adding that “a number of
members noted their dissatisfaction with the Committee’s current
approach for communicating its views regarding the appropriate path for
monetary policy, and looked forward to considering possible enhancements
to the Committee’s communications.

One thing the FOMC members were able to agree on was a new and
improved SEP. Quarterly pojections for growth, jobs and inflation have
always been based on officials’ presumption of what “appropriate
monetary policy” would be during any time in the forecast period. But
the FOMC has never disclosed just what “appropriate monetary policy” was
expected to be.

After the FOMC voted to maintain existing monetary policy, it got a
recommendation to do so from a communications subcommittee headed by Fed
Vice Chairman Janet Yellen that includes Evans and Philadelphia Fed
President Charles Plosser.

The proposal for “incorporating information about participants’
projections of appropriate monetary policy” into the SEP was supported
by the Fed staff, which reported on how other central banks use interest
rate projections.

There were differing views, but the minutes say that “at the
conclusion of their discussion, participants decided to incorporate
information about their projections of appropriate monetary policy into
the SEP beginning in January.”

“Specifically, the SEP will include information about participants’
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.”

“The SEP also will report participants’ current projections of the
likely timing of the first increase in the target rate given their
projections of future economic conditions,” the minutes say. “An
accompanying narrative will describe the key factors underlying those
assessments as well as qualitative information regarding participants’
expectations for the Federal Reserve’s balance sheet.”

Although it could not be immediately confirmed, the funds rate
projections will presumably be presented in the SEP table much the same
way as GDP, unemployment and inflation are — with both a “central
tendency” forecast and a “range” of projections.

The minutes do not record the actual vote on introducing the
federal funds rate into the SEP, but they suggest there was not total

“Most participants agreed that adding their projections of the
target federal funds rate to the economic projections already provided
in the SEP would help the public better understand the Committee’s
monetary policy decisions and the ways in which those decisions depend
on members’ assessments of economic and financial conditions,” they say.

But there were different viewpoints on the optimum method of
presenting the funds rate projections.

“One participant suggested that the economic projections would be
more understandable if they were based on a common interest rate path,”
say the minutes. “Another suggested that it would be preferable to
publish a consensus policy projection of the entire Committee.”

Others apparently didn’t like the idea at all. “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 signaling
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.”

“Most participants viewed these concerns as manageable; several
noted that participants would have opportunities to explain their
projections and policy views in speeches and other forms of
communication,” the minutes go on. “Nonetheless, some participants did
not see providing policy projections as a useful step at this time.”

The minutes say “a number of participants suggested further
enhancements to the SEP” and disclose that Fed Chairman Ben Bernanke
“asked the subcommittee to explore such enhancements over coming

There is widespread dissatisfaction, as the minutes, say with a
calendar date for the zero funds rate, but there has been little
agreement beyond that. Evans has argued for a set of statistical
triggers for raising the federal funds rate. He has said the funds rate
should stay near zero so long as unemployment remains 7% or more and so
long as inflation does not go above 3%.

Plosser, in early November, recommended, in addition to publishing
FOMC participants’ funds rate projections in the SEP, that the FOMC
announce an explicit 2% inflation target and “provide information on the
FOMC’s reaction function.”

The Fed should “communicate policy decisions in terms of changes in
the economic conditions that the FOMC is using to formulate policy…,”
said Plosser. “Because policymakers do not know with certainty how
economic conditions will evolve, they cannot say with certainty what
policy will be in the future, but policymakers can provide information
on what factors will influence their policy decisions.”

“In addition to describing the set of conditioning variables that
we consider as we formulate policy, we should communicate our policy
decisions in terms of the changes in these important conditioning
variables,” Plosser said. “If the Fed chooses a consistent set of
variables and sticks to them, the public would better understand our
reaction function and thus have a greater ability to form judgments
about the likely course of policy. This approach would reduce
uncertainty about policy actions and promote stability.”

Minneapolis Fed President Narayana Kocherlakota had a similar
recommendation in early November, saying the FOMC should provide a
“public contingency plan” that would “provide clear guidance on how it
will respond to a variety of relevant scenarios.”

Whatever their funds rate projections turn out to be on Jan. 25,
FOMC members remained divided on what policy they thought was
appropriate on Dec. 13. As was already known, Plosser, Kocherlakota and
Dallas Fed President Richard Fisher, who had dissented against easing
moves in August and September, voted with the majority, while Evans
dissented for the second straight meeting in favor of immediate further

Evans had his sympathizers, the minutes make clear. “A number of
members indicated that current and prospective economic conditions could
well warrant additional policy accommodation, but they believed that any
additional actions would be more effective if accompanied by enhanced
communication about the Committee’s longer run economic goals and policy

But “a few others continued to judge that maintaining the current
degree of policy accommodation beyond the near term would likely be
inappropriate given their outlook for economic activity and inflation,
or questioned the efficacy of additional monetary policy actions in
light of the nonmonetary headwinds restraining the recovery.”

-more- (1 of 2)

** Market News International **

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