Fed to tip its hand on interest rates
Bernanke’s forecasts may encourage more people to borrow, ease volatility
The Federal Reserve, trying a new tack to stimulate the economy, is tweaking the way it communicates with the public.
Starting this month, the central bank will start providing a regular forecast of when it’s likely to change the key short-term interest rate that it sets.
Analysts say the novel move could act as a kind of economic stimulus by influencing more people to borrow and take risks, and help push down already low yields on long-term bonds.
The central bank’s new communications strategy, revealed in meeting minutes released Tuesday, is another of Fed Chairman Ben Bernanke’s efforts to make the traditionally secretive institution more transparent.
It wasn’t that long ago that the Fed shared almost no information about its thinking or decision-making process. It preferred instead to keep things veiled and to influence markets and the economy by using the element of surprise with sudden announcements.
But under Bernanke, the Fed has moved toward giving the public more information — too much, some would say. The Fed believes, as other central bankers around the world do, that better communication of its plans and goals would reduce volatility in the markets.
Under the new practice, the Fed, upon conclusion of its Jan. 24-25 meeting, will publish projections of what it sees as the target short-term rate in the fourth quarter of this year and the “next few calendar years,” according to the minutes.
The Fed will update the forecast four times a year, along with its previously established practice of issuing projections for economic growth, unemployment and inflation.
In addition, the new forecast will give the Fed’s thinking about when it will likely begin to make its first increase in its benchmark short-term rate. The Fed has held the so-called federal funds rate — an overnight lending rate that influences rates on loans for businesses and consumers — near zero since December 2008.
In August, the Fed said it expected to keep this rate at its rock-bottom level until at least mid-2013. Many investors, however, don’t see the Fed beginning to raise rates until 2014.
As such, analysts don’t expect the new communications strategy to have a major effect on the markets or the economy. But providing such a forecast could “increase the potency” of the Fed’s policies by helping shape the expectations of behavior of companies, investors and consumers, said Alan Levenson, chief economist at mutual fund giant T. Rowe Price in Baltimore.
“I don’t think it’s a huge move,” he said. Still, “if you tell your child that if you do X, I’m going to do Y, and they understand exactly what you mean by X and Y, you’re more likely to get the behavior you want.”