Fed to offer interest rate forecasts

In a major shift, the U.S. Federal Reserve will start updating the public four times a year on how long it plans to keep short-term interest rates at record lows, according to minutes from its December policy meeting.

The first forecast will be included in the central bank’s economic projections after its Jan. 24-25 meeting, the minutes said.

The decision was heralded as “a giant leap forward in Fed communications” by Paul Edelstein, director of financial economics at IHS Global Insight.

“In the Fed’s Summary of Economic Projections (SEP), projections for GDP, inflation, and unemployment are conditional on the path of monetary policy that is consistent with the Fed’s goal to promote maximum employment and price stability,” explains Edelstein.

“The inclusion of target interest rate forecasts provides explicit information about what that assessment is. In that sense, readers of the SEP will be informed as to what the Fed considers appropriate monetary policy, and the path for the fed funds rate (and balance sheet) it is likely to implement.”

The Fed has left its key short-term rate near zero for the past three years. In August, it that it plans to leave it there until at least mid-2013, unless the economy improves.

After its Dec. 13 meeting, the Fed issued a policy statement that portrayed the U.S. economy as improving slightly. The central bank declined to take any additional steps to boost growth.

Going forward, the SEP will also include the projections of the Fed chiefs for the timing of the initial target rate hike and expectations for the central bank’s balance sheet.

“The Fed’s intention with this move is to alleviate the uncertainty regarding future monetary policy that many believe is an impediment to a fuller economic recovery,” Edelstein says. “But an even larger source of uncertainty for businesses, households, and financial markets—namely, fiscal and regulatory policy—remains unchanged. This is outside the Fed’s jurisdiction.”

The minutes also suggest the Fed could be poised to launch a new step to invigorate the economy. Some members favoured bolder action but said they wanted to wait until the more explicit communication policy was in place.