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03 October 2023

Fed to unveil rate forecasts from January


The Federal Reserve will begin to publish interest rate projections in economic forecasts this month, a major effort to improve communications with the public and financial markets.

Fed officials at a December 13 policy-setting meeting "decided to incorporate information about their projections of appropriate monetary policy" into their quarterly economic outlook reports, the minutes of the meeting released Tuesday revealed.

Analysts noted that minutes from Federal Open Market Committee (FOMC) meetings typically hold few surprises, but this time marked a huge leap toward transparency.

"The Fed took a giant step towards enhancing the clarity and transparency of monetary policy by agreeing to include explicit interest rate forecasts in its quarterly projections," said Paul Edelstein at international consultancy IHS Global Insight.

Some Fed officials are pressing for a further overhaul in communications, the minutes suggested.

The Fed's interest rates information will be included in the next batch of US economic forecasts, known as the Summary of Economic Projections, at the end of a two-day FOMC meeting on January 25.

"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 minutes said.

In addition, the economic forecasts will include the FOMC's projections of the "likely timing" of the first increase in the target rate.

"A number" of participants at the December meeting noted their "dissatisfaction" with the FOMC's current approach for communicating its views regarding the appropriate path for monetary policy, the minutes said.

They "suggested further enhancements to the SEP," and Fed chairman Ben Bernanke asked a subcommittee "to explore such enhancements over coming months."

The benchmark federal funds rate is the overnight interest rate used in interbank lending. The Fed has kept the rate ultra-low, between zero and 0.25 percentage point, since December 2008 in a bid to support recovery from steep recession.

In its post-FOMC December statement, the policy makers reiterated that weak economic conditions "are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."

Only one member, Charles Evans, cast a dissenting vote, calling for more stimulus to jump-start the weak recovery.

However, the minutes revealed divisions among participants over strategy. Some said the repeated reference to mid-2013 "might need to be adjusted before long."

A number of members indicated that current and future economic conditions "could well warrant additional policy accommodation," but to be more effective, any further actions would need to be accompanied by better communication of the FOMC's longer-run goals and policy framework.

A few others continued to argue that maintaining the extremely loose monetary policy beyond the near term "would likely be inappropriate" given their perspectives on economic activity and inflation.

The minutes showed Fed policymakers had seen little change in economic conditions since their November 1-2 meeting, the last time they released economic projections on economic growth, unemployment and inflation.

The economy was expanding moderately, inflation was tame and high unemployment -- at 8.6 percent in November -- would decline only gradually.

But the new communications approach on future rate changes should help the financial markets, said Michael Gregory at BMO Capital Markets.

Gregory said it was unclear whether that would be on a quarterly or monthly basis "but this will assist the market in constructing the expected path for the Fed funds rate."