Trying to read between the lines of the Fed rate message
NEW YORK (Reuters) - For a central bank that wants to make transparency its hallmark, the Federal Reserve's new forecast of nearly three more years of super-low rates has left room for a few doubts.
The Fed surprised markets last Wednesday when it extended its previous forecast for keeping its key interest rate "exceptionally low" until at least late 2014, more than a year longer than its previous guidance.
Ninety minutes later, the U.S. central bank published charts showing that more than a third of its policymakers expected a rate rise before 2014, whiplashing bond markets.
The difference in tone between the dovish statement of the Fed's policy-setting committee and the somewhat more hawkish-looking projections of its 17 individual members, has left some economists unsure as to when the Fed will start to reverse its historic, all-out support of the U.S. economy.
Some are re-examining the Fed's choice of language and questioning whether the term "exceptionally low" really means the current level of the Fed funds rate of zero to 0.25 percent.
Others are asking what the phrase "late 2014" means more precisely as they try to decipher the nuances of a central bank that is taking bold steps to support the economic recovery while at the same time stressing transparency into its inner workings.
"You can't possibly know with any degree of confidence what will unfold given this degree of uncertainty," said Michael Moran, chief economist at Daiwa Capital Markets, in New York, referring to the wide range of views on where rates are headed. "You just have to keep an open mind on monetary policy."
The Fed has kept short-term rates below 0.25 percent for more than three years already and purchased some $2.3 trillion in long-term securities to help the U.S. economy claw its way back from a brutal recession.
With the recovery still fragile and at risk from fallout from Europe's crisis, the Fed is running out of tools and has turned to making statements about its intentions over the coming years in the hope of assuring skittish markets that it is committed to sticking with its super-loose monetary policy.
That could keep longer-term rates low in the open market. Low rates usually encourage economic activity and boost hiring.
This delicate management of expectations is playing out just as Fed Chairman Ben Bernanke is shining a light on what in the past were the central bank's opaque internal deliberations.
The first-ever release last week of projections by Fed policymakers of where they expect interest rates to be over the next few years revealed a remarkably wide range of views.
Three officials expected a rate rise as soon as this year. Two others did not see that happening until 2016.
Economic, rate projections: link.reuters.com/zud36s
FOMC statement from Jan 24-25 meeting: FED/FOMC
In an early sign of confusion, yields on 10-year Treasuries dropped after the Fed's late-2014 comment on Wednesday and fell to as low as 1.92 percent. They bounced back to 2 percent after the rate projections were revealed.
Asked for clarity by reporters, Bernanke made it clear that the statement from the Federal Open Market Committee, which sets rates and currently has 10 voting members, prevailed over the 17 individual projections.
"The FOMC will always, in some sense, trump the projections of forward interest rates," he said.
But Charles Plosser, president of the Philadelphia Fed and among the most hawkish of the Fed's top officials, acknowledged on Monday that the FOMC's statement was "not as clear as it could have been."
Having low rates until late 2014 is "conditional on the evolution of the economy. I think that we don't make that clear enough," Plosser told CNBC television.
"A lot of people have been reading the statement as if it was a commitment and it is not a commitment."
ALL EYES ON 2014
Plosser, who has focused more on keeping a lid on inflation than lowering the 8.5-percent U.S. unemployment rate, confirmed that he was one of the three officials forecasting a rate rise this year. He is among those skeptical of the Fed's ultra-easy policy and its talk of standing pat for some time to come.
Six of the FOMC's 17 policymakers saw rates rising to between 0.25 percent and 2 percent by the end of 2013. By the end of 2014 they were joined by a further five who expected increases in borrowing costs and as a group they saw rates between 0.25 and 2.75 percent, with a median of 0.75 percent.
The other six projected no change until after 2014.
Adding to intrigue over the path ahead for rates, Plosser, fellow hawk Richard Fisher of Dallas, and Minneapolis Fed President Narayana Kocherlakota, a moderate hawk, all regain positions on the FOMC in the critical year of 2014.
Bernanke, along with vice chair Janet Yellen and William Dudley, the influential head of the New York Fed, has steered the Fed's policy moves. But the chairman's current term expires in early 2014, adding to the uncertainty on the horizon.
Since August, when Bernanke clearly implied in a speech that "exceptionally low" rates meant zero to 0.25 percent, Wall Street has run with that assumption.
Now some economists are reading between the lines.
"There are different definitions of 'exceptionally low' levels of the federal funds rate. Perhaps one could think of any rate below 1 percent as exceptionally low," said Thomas Simons, money market economist at Jefferies & Co, who co-published a note to clients on the topic.
"What is your definition of late 2014? Maybe it's September," Simons said.
Accordingly, futures traders are hedging their bets over what the Fed will actually do.
According to rates contracts at exchange operator CME Group Inc, traders are pricing in a 48 percent chance that the first rate hike will occur in June, 2014. There is a 62 percent chance that it comes in July, 2014.
Economists at FTN Financial argued the Fed's statement was intended to reinforce the primacy of the FOMC over the broader group. "The unspoken message is that there are enough voting members at or near zero to keep rates unchanged even if others at the Fed disagree," they wrote last week in a note to clients.
(Reporting by Jonathan Spicer; Additional reporting by Ann Saphir in Chicago; Editing by Kim Coghill)
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