In an effort to enhance the clarity and transparency of its public communications, the Federal Open Market Committee has begun detailing its plans for short-term interest rates on a quarterly basis. According to the minutes of the group's December 2011 meeting, the subcommittee on communications recommended an approach for incorporating information about participants' projections of appropriate future monetary policy into the Summary of Economic Projections, which the FOMC releases four times a year. Specifically, the SEP will include information about the projections of the Fed's 12 regional bank presidents and five members of the Board of Governors of the appropriate level of the target federal funds rate in the fourth quarter of the current year, the next few calendar years and over the longer run. The SEP also will report projections of the likely timing of the first increase in the target rate given their projections of future economic conditions. An accompanying narrative will describe the key factors underlying those assessments as well as information regarding their expectations for the Federal Reserve's balance sheet, according to the FOMC minutes.
Most participants in the December meeting 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, the minutes stated.
"In my opinion, this is a substantial, first- order improvement in policy communications, and this greater clarity may have significant additional value for improving how the economy operates," said Federal Reserve Bank of Chicago President Charles Evans in a speech to the Indiana Bankers Association on Jan. 13.
Critics, however, contend that providing projections to the public will confuse the markets and create volatility. There are also concerns about the public potentially believing the information is more of a commitment than a projection of future interest rates.
The FOMC minutes state that some committee members expressed concerns about having separate projections, suggesting it would be less confusing for the public to see a consensus from the committee.
"It's not going to be perfect" because "you still have 17 possible paths" laid out by Fed officials, Federal Reserve Bank of St. Louis President James Bullard was quoted as saying in an article on Bloomberg.com.
To view the Fed's first rate projections as well as read the varying opinions on this communications strategy, go to BankNews.com and click on this column.
[Sidebar]
More Information
The Fed's first forecast for interest rates was included in its economic projections issued after its Jan. 24-25 FOMC meeting.
The Federal Reserve has released templates showing the format of the two charts it will use to report participants' projections of the appropriate target federal funds rate.
The first chart shows participants' projections for the timing of the initial increase in the target federal funds rate.
The second chart, with dots representing policymakers'individual projections, shows participants' views of the appropriate path of the federal funds rate over the next several years and in the longer run.
[Author Affiliation]
* Karl English * Senior Editor * kenglish@banknews.com
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