Forecasting Fed Forecasting

Continuing down its previously announced path of increased transparency, the Fed’s December meeting minutes revealed Tuesday it will begin publically detailing its plans for key central bank rates. The change is effective immediately, meaning the first forecast will be released after the next meeting, scheduled for January 24-25.

The aims are ostensibly increased transparency and some alleviation of uncertainty, though the extent to which either is achieved (or even possible) remains to be seen. After all, the Fed’s last attempt to increase transparency seemingly resulted in more confusion than clarity—at least in the near term (as we discussed then). The possibility this move has some unintended consequences exists as well—for example, it could give the impression the Fed’s stating its definitely intended future course, not simply its projections of future monetary policy direction, which are subject to change as market and economic conditions evolve. And the fact there’s been some confusion among Fed watchers about what information will be included (among other things) hardly instills ironclad confidence in the Fed’s ability to clearly communicate.

But overall, an incremental step toward (intended) increased transparency is likely a positive. Especially in comparison to some central banks (like the ECB) that are strikingly opaque when it comes to communicating intended actions or forecasts. And this applies not only to interest rate projections, but also to things like quantitative easing (QE). Whereas the Fed pretty coherently communicated its various QE initiatives’ intended scopes and durations, the ECB’s been much more difficult to read—even downright evasive when it comes to telegraphing its plans. Overall, less transparency is likely a less effective means of effecting monetary policy, given it makes it tougher for investors and markets to anticipate central bank policy.

The Fed’s latest move is also more transparent compared to itself not so long ago. Consider: It hasn’t been long since the Fed’s began communicating whether and how much it changed overnight rates—Alan Greenspan was the first Fed Chairman to openly communicate that information (while still being rather famously inscrutable). Before that, Wall Street firms and Fed observers had to employ other means of reading the tea leaves to determine not only what the Fed might do down the road, but also what it had actually done at its most recent meeting.

In our view, it’s generally better to set some market expectations than not—even if they’re somewhat vague forecasts that evolve over time. If there’s one certainty in markets, it’s markets don’t much like uncertainty, and they tend to move most on surprises. So removing some of monetary policy’s surprise power may be a net positive.

Not to mention Norway’s, Sweden’s and New Zealand’s central banks already release their forecasts. So far, that policy hasn’t produced particularly deleterious consequences for any of them—seemingly making the chances the US suffers as a result of this latest Fed move fairly slim.