The Federal Reserve announced recently that beginning later this month, it will begin publishing end-of-year forecasts for short-term interest rates. Following its Jan. 24-25 meeting, the Fed will make public the projections of each of its 17 policymakers – five governors in Washington, and the 12 regional bank presidents – for rates in the fourth quarter of the current year.
Responses to the change from market watchers has ranged from glowing:
“This step is arguably the greatest increase in transparency undertaken by the Bernanke Fed, and could represent his most lasting change to the way the FOMC conducts conventional interest-rate policy.” (J.P. Morgan economist Michael Feroli quoted in the Wall Street Journal)
to wary:
“Sometimes, less openness can be more effective, and we wonder whether both Mr Bernanke and investors might come to regret this decision,”(Ian Shepherdson, chief U.S. economist at High Frequency Economics quoted by Reuters)
Keep in mind that what the Fed will be doing is offering forecasts and these are forecasts only. In February 2008 the Fed was still forecasting 2008 real GDP would be 1.3 to 2.0%, whereas the economy was actually about to experience the most serious recession since the Great Depression. Anyone who would have relied on their forecasts would have been in deep trouble. The lesson is that the ability of anyone to forecast the economy beyond the next quarter is generally poor since it relies on the future decisions of millions of individuals. Some are saying the change may even increase volatility.
The Fed itself tracks our Fed fund futures to look at the view of market participants (In fact, Federal Open Market Committee minutes from a meeting last January stated “Futures quotes indicated that the expected path for the federal funds rate did not change appreciably over the intermeeting period.”) While we agree with more openess and the actions of the Fed, if someone wants to predict the Fed Funds rate, I would suggest using CME Group Fed Fund futures by using our Fed Watch tool.
What do you think?. What effect will publishing rate forecasts have on the economy and on markets?
Sean Tully is the managing director of interest rate products at CME Group
I think the effect will be the same. It’s fascinating to see that anyone would take a fed forecast seriously. Not to say the fed doesn’t know what their doing, but I take Bernanke’s advice with a grain of salt, to be quite frank, only because it’s obvious there has been a recession. And as this article states, the ability to forecast the economy is poor because it relies on the future decisions of millions of individuals.
Yet more smoke and mirrors. Look behind that last veil and relearn the lesson that you cannot eat gold.
Before we can begin opining on the effectiveness of this move I think we need to wait for the first set of forecasts to be released 1/25 and perhaps those that follow.
For me at least the value come from being able to interpret those rate forecasts against the Fed’s (and private economists’) outlook for inflation and growth. More importantly, it will be interesting to see how their thinking on rates *changes* as they alter their views on the inflation, growth.
Also, I’d be interested to see if their forecasts lead or lag the market’s pricing of forward rates.
Is more openness/transparency a good thing? I don’t know. But if we get more clarity as to their thinking, then yes it is a good thing.
We all know that the Riksbank has done this for sometime; I have traded the SEK against other currencies for a number of years and their openness/clarity has been helpful.
Essan – Thanks for the insightful comment. It’ll be very exciting to see the market reaction to the Fed’s first forecast on the 25th.