Fed to Go Public on Rate Actions in Historic Move Toward Transparency

FOMC members agree to publish a forecast of their own actions

Federal Reserve building, Washington, D.C. (Photo: AP) Federal Reserve building, Washington, D.C. (Photo: AP)

In a historic move that points to increasing transparency at the Federal Reserve, the Federal Open Market Committee announced Tuesday that beginning this month it would start to publish a forecast of its own actions.

The FOMC will publish fed funds forecasts for the next few years starting with its Jan. 25 meeting, as well as expectations of the timing of the first rate hike—thus launching a new policy intended to heighten the Fed’s power by influencing investor behavior.

 The historic move was agreed upon at the Fed’s policy-making meeting on Dec. 13 and announced Tuesday with the release of FOMC meeting minutes.

Specifically, the minutes stated: “A number of members indicated that current and prospective economic conditions could well warrant additional policy accommodation, but they believed that any additional actions would be more effective if accompanied by enhanced communication about the Committee's longer-run economic goals and policy framework.”

The initial forecast, due in three weeks, “is likely to make clear that the Fed intends to keep short-term interest rates near zero beyond the middle of 2013, which Fed officials have said could stimulate the economy modestly by further reducing borrowing costs,” according to The New York Times.

By publishing fed funds forecasts for the next few years as well as rate hike expectations, the FOMC should effectively extend the extended period before the rate hike, wrote Michael Cloherty, head of U.S. rates strategy at RBC Capital Markets, in an analyst note.

“We think the majority of members will show the first rate hike coming far after the end of the mid-2013 extended period (we’d guess the majority will show the rate hikes starting in 2014),” Cloherty wrote. “When the Fed introduced the ‘no rate hikes before mid 2013’ language, implied volatility in shorter maturities dropped.  That vol has since picked up due to concerns about LIBOR spreads moving sharply, but we think we will see a moderate compression in implied vol once the FOMC’s forecasts are released.”                            

Read Bernanke Press Conference: The Message Was the Medium—News Analysis at AdvisorOne.com.

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