In a major policy shift,the US Federal Reserve will start providing a forecast on interest rates from this month.The move will provide more clarity to investors seeking to discern the monetary policy trajectory of the world’s largest economy.
The decision to provide interest rate projections was taken at the Federal Open Market Committee (FOMC) meeting held last month,the minutes of which were disclosed on January 3.
FOMC is the apex body for monetary policy in the US.
“At the conclusion of their (FOMC participants) discussion,participants decided to incorporate information about their projections of appropriate monetary policy into the SEP (Summary of Economic Projections) beginning in January,” according to the minutes of the FOMC meeting. The US Fed publishes the SEP four times in a year. Following the 2008 financial meltdown,the central bank has embraced a dovish monetary approach and interest rates have been kept at near-zero levels to bolster overall economic growth.
“Specifically,the SEP will include information about participants’ projections of the appropriate level of the target federal funds rate in the fourth quarter of the current year and the next few calendar years and over the longer run…,” it said.
Furthermore,the SEP would also report participants’ current projections of the likely timing of the first increase in target rates,based on expected future economic conditions. The decision to provide an interest rate forecast is seen as a major victory for Federal Reserve Chairman Ben Bernanke,who has been advocating more transparency since taking over the reins of the central bank in 2006. However,some participants at the meeting had expressed reservations about the latest decision.
“Some participants expressed concern that publishing information about participants’ individual policy projections could confuse the public. For example,they saw an appreciable risk that the public could mistakenly interpret participants’ projections of the target federal funds rate as signaling the committee’s intention to follow a specific policy path…,” the minutes showed.
Most participants viewed these concerns as manageable and many of them said participants would have opportunities to explain their projections and policy views in speeches and other forms of communication. Going by reports,central banks worldwide are generally apprehensive of providing interest rate predictions since that could impact markets if some projections turn out to be off the mark.