Fed officials fretted over investor reaction to rate forecasts: minutes

WASHINGTON/SAN FRANCISCO Wed Apr 9, 2014 6:10pm EDT

An eagle tops the U.S. Federal Reserve building's facade in Washington, July 31, 2013. REUTERS/Jonathan Ernst

An eagle tops the U.S. Federal Reserve building's facade in Washington, July 31, 2013.

Credit: Reuters/Jonathan Ernst

WASHINGTON/SAN FRANCISCO (Reuters) - Federal Reserve officials fretted last month that investors would overreact to policymakers' fresh forecasts on interest rates that appeared to map out a more aggressive cycle of rate hikes than was actually anticipated.

The published rate forecasts of the current 16 Fed policymakers, known as the "dots" charts, suggested the federal funds rate would end 2016 at 2.25 percent, a half percentage point above Fed officials' projections in December. Bonds fell when the charts were initially released, at the close of the U.S. central bank's March 18-19 meeting, as investors priced in slightly sharper rate rises.

But in minutes of the meeting published on Wednesday, several of the meeting's participants said the charts "overstated the shift in the projections," suggesting the Fed is not as eager to tighten policy as the dots had seemed to suggest.

The minutes drove up Wall Street shares, with all three major U.S. stock indexes ending up more than 1 percent, and caused the dollar to weaken. Traders pushed out their expectations of a first Fed rate hike by about six weeks, to July 2015, trading in interest-rate futures showed.

The minutes "eased concern from market participants that the Fed is on a set course to pull back before the economy is ready," said Phil Orlando, chief equity market strategist at Federated Investors in New York.

Although the latest chart showed a rise in the median forecast for where rates will be at the end of 2016, some Fed officials thought the change could be misleading.

One reason the chart could misrepresent the Fed's policy intentions is that each dot marks a rate forecast from one of 16 Fed officials, of which only nine vote on policy.

The minutes also showed that officials wanted to emphasize that the official policy statement, and not the dots charts, give a better indication of the likely path of rates.

The president of the Chicago Federal Reserve Bank, Charles Evans, speaking on Wednesday in Washington, underscored that point, saying there are "some serious flaws" with the dot charts because each Fed official has very different policy assumptions.

"A lot of the differences of opinion that we have are on full display in those dot charts," he said.

The minutes shed little new light on what might prompt an eventual policy tightening after the Fed ends its bond-buying program, which most policymakers thought would be completely wound down in the second half of 2014.

After its March meeting, the Fed said in a statement that it would wait a "considerable time" following the end of its bond-buying program before finally raising interest rates.

Fed Chair Janet Yellen played down the "upward shift" in Fed officials' rate forecasts in her post-meeting press conference, saying that the "dots" are not the Fed's primary way to communicate policy.

But what drew the most attention from financial markets was Yellen's definition of "considerable time" as "around six months," depending on the economy.

That comment, along with the forecasts that suggested rates could rise more sharply than Fed officials previously thought, sent stocks and bonds tumbling that day.

The minutes, published with the typical three-week lag, record no discussion of what time frame the Fed viewed as "considerable."

It did show officials were unanimous in wanting to ditch the quantitative thresholds they had been using to telegraph a policy tightening.

"Almost all members judged that the new language should be qualitative in nature and should indicate that, in determining how long to maintain the current (low) federal funds rate, the Committee would assess progress, both realized and expected, toward its objectives of maximum employment and 2 percent inflation."

A couple of the voting members wanted to commit to keeping rates low if inflation remains persistently below the Fed's 2 percent goal.

The minutes included little on what specific economic conditions might prompt the Fed to raise its key rate from near zero, where it has been since the depths of the recession in late 2008. But they showed that Fed officials engaged in a vigorous discussion of how best to tweak rate guidance, including in a previously undisclosed March 4 videoconference.

"We weren't expecting a ton of changes and we didn't get them," said Todd Schoenberger, managing partner at Landcolt Capital in New York. "As the economy sputters along, the Fed will continue doing what it needs to do."

(Reporting by Jonathan Spicer and Ann Saphir; Additional reporting by Rodrigo Campos, Ryan Vlastelica and Richard Leong; Editing by Andrea Ricci and Leslie Adler)

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Comments (3)
divinargant wrote:
Just making it up as they go and jaw boning all the way to keep the market pumped up. What is really amusing is to hear these talking heads say that rising rates at even a slower pace would be a good thing for the market. I say once the FED abandons their ZIRP, even if and when the economy is showing signs of moderate organic growth, the equity market will begin its true correction of 20-30% at least and when priced for inflation the real value will shock even the most bullish investor. It will correct, it’s just a matter of when. If not plugged, it will crash.

Apr 09, 2014 2:37pm EDT  --  Report as abuse
It is hard to know whether to laugh or cry when one reads the things that the elderly members of our FOMC worry about. Can anyone with any experience in the real world of business or commercial banking believe that the “target rate” of interest, the 24 hour rate banks charge each other for reserve loans, has anything to do with the real economy where employers hire people, spend their revenues, and, if they are private and profitable, pay taxes?

The Fed policy makers seem fixated on the target rate of interest because Hayek and Keynes wrote about the importance of the “bank rate” for the economy of the UK as it existed eighty years ago. But the target rate is nothing like the bank rate; just as the QE securities purchases of the Fed are nothing like the open market purchases of the Bank of England eighty years ago.

Years ago John Lindauer and the late George Stigler explained the difference and noted why interest rate changes and QE funneled into the world’s financial markets via the Fed’s 21 primary dealers will not work during a time of prolonged economic depression such as we now have.

Businesses with empty factories and idle equipment because they have not enough revenues are not going to hire more workers and reactivate their factories if the virtually meaningless rate of 24 hour loans changes. And as we now know, commercial banks with more reserves than the Fed requires are not going to borrow reserves they cannot use.

Our FOMC members are living in the past and continue to repeat certain policies month and after month and expect a different outcome. The US is not the UK of eighty years ago – it’s long past time for the media to do its job and hold the FOMC to account.

Lindauer and Stigler were right. We don’t need forward guidance, we don’t need more regulations, we don’t need more federal spending; We do need competent trained Federal Reserve governors with real world experience in business and commercial banking so they know what policies will work and what indicators are significant.

Apr 09, 2014 4:39pm EDT  --  Report as abuse
The market is so drunk with power that regardless of what anyone says or does it will continue to go up. But it is a house of cards.

Apr 09, 2014 8:33pm EDT  --  Report as abuse
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