Interest Rate Forecasts? Bring it On!

In the Fed’s last rate statement, it decided to sit on its hands and make no changes to its monetary policy. Sticking to its promise, the Fed reiterated its vow to maintain low interest rates until mid-2013 and pledged to carry on with Operation Twist.

If you recall, Fed Chairman Ben Bernanke actually sounded pretty upbeat about the state of the economy, though he did throw out warnings about downside risks to growth. He said the economy has been expanding moderately and mentioned that the recent string of positive economic reports has come as quite a surprise. However, he made no mention of interest rate forecasts, which disappointed a few market players, including yours truly.

But just like the Transformers, there was more than meets the eye to the Fed’s rate statement. With the most recent FOMC meeting minutes providing us with key insights on what happened behind closed doors, we learned that the Fed will no longer keep markets guessing about interest rates.

That’s right, folks! Starting this month, the central bank will map out interest rate forecasts as a part of its communication strategy. What it plans to do is reveal each FOMC member’s predictions of target federal funds rate in the fourth quarter of 2012 and succeeding years.

It also plans to report when these officials expect the Fed will hike rates for the first time.
Of course, all of this will be in addition to the Fed’s formal economic forecasts, which will still be released four times a year. What a way to spoon-feed the markets with info, eh?

With that, market participants will be able to understand the Fed’s monetary policy decisions better as they would have access to the policymakers’ assessment of financial and economic conditions. Aside from that, the improvement in the Fed’s transparency will help align the public’s interest rate expectations with its own.

However, several analysts aren’t so convinced that these changes in the Fed’s communication strategy will lead to anything significant. For them, providing a forecast for short-term interest rates won’t make much of a difference since rates are already at their record lows and can’t fall any further.

On a more upbeat note, some FOMC members hinted that they will soon make changes to the Fed’s usual rhetoric of keeping interest rates at their ultra-low levels until mid-2013. Does this mean we can expect the Fed to hike rates sometime next year?

Maybe, maybe not. As we all know, the Fed’s monetary policy decisions are based on the economic performance of the U.S. so we’ll have to sit tight and wait for the figures to show improvements first. Aside from that, the Fed has yet to work on its longer-term monetary policy goals in order to steer the economy in a clearer direction. This way, traders like you and I can make sense of the Fed’s shorter-term policy decisions once we see the bigger picture.