NEW YORK (MainStreet) – The Federal Reserve is going to get more specific about economic forecasting, and will offer more clues on when and how much it will move interest rates. This will likely cause initial confusion among bank savers, but should ultimately reduce uncertainty for those looking for credit.
The news from the Fed comes at a time when the economy continues to heal. Today’s announcement from the Bureau of Labor Statistics is a good example of that, with the unemployment rate sliding down from 8.7% (revised upward) in November to 8.5% in December. Overall, the economy added 200,000 new jobs.
But the Fed is all about interest rates, and that’s what its new forward guidance proposal seems to be all about. Economists got a hint of what the Fed was up in its Dec. 13, 2011 meeting.
In the minutes of that meeting, some Fed officials apparently expressed frustration about how their economic forecasts were being formulated for the public and for the financial markets. According to the minutes, “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.”
Now, the Fed is starting to formalize those communication plans. This month the Board of Governors will begin providing their own financial forecasts for short-term interest rates – always a hot topic for financial institutions, businesses and bank savers. The “predictions” will come from the members of the Fed’s Board and from the presidents of its five regional U.S. banks, and will be published on a regular basis. The first forecast is expected to be published right after Jan. 25, 2012.
It’s a wrinkle that’s not exactly brand new, as the Fed already provides short-term outlooks on key issues like inflation and the employment picture. But the interest-rate forecast is a departure, and could trigger some key impactors that could flow through the economy. These three would be at the top of that list:
The move would provide more clarity for the financial markets. By publishing the Fed’s interest-rate forecast, the markets will better know where it stands on economic policy. For example, the Fed will publish its own estimates on when it might tweak short-term interest rates on a quarterly basis. Knowing where the Fed is going with interest policy should reduce uncertainty among economists, investors, banks savers, and business owners looking for credit.
It’s a risk against the Fed’s credibility. While investors and economists would likely welcome increased transparency from the Fed, if officials are forced by economic events to keep changing their forecasts, that could reduce the Fed’s credibility with the financial markets and the public once word trickled down from the media that the Fed keeps “changing its story.”
The forecast could be confusing. According to a memo sent by the Fed to Fox Business this week, the rate forecast won’t come in the form of a single estimate – instead, it will come from 17 different Fed officials.
“The projections for the federal funds rate will come from members of the Washington-based Board of Governors and the presidents of the regional Reserve Banks,” said the note. “So, it will be a collection of individual projections from these officials – not a single projection.”
That could prove confusing if all 17 officials aren’t on the same page.
By and large, seeing more transparency from the Federal Reserve is a positive development. But, there’s no doubt there could be some more tweaking and adjusting before this new communication model is working on all cylinders.
For more about how changing interest rates affect your money, check out MainStreet's look at 3 Ways Inflation Is Sabotaging Bank Savings!