The most highly anticipated segment of the Federal Reserve’s big policy day on Wednesday ended up being the release of Fed members’ future policy projections.
The second such release in what is a new program of transparency, the report indicated that a few members of the Federal Open Market Committee had improved their economic forecasts and foresaw a faster onset of tighter monetary policy. Many investors interpreted this as a sign that a new, somewhat expected round of quantitative easing this year is no longer forthcoming.
That said, the true change in the Committee’s views appeared to be slight, with interest rights likely to rise significantly in 2014. What’s more, Morgan Stanley analyst Gabriel de Kock argues that policy projections diverge from the Fed’s overall assessment of future policy–“exceptionally low levels for the federal funds rate at least through late 2014”–because Committee members actually project firming sooner than that when polled alone:
In contrast with the FOMC’s unchanged policy guidance, the FOMC and non-voting regional presidents’ fed funds rate forecasts shifted hawkishly on both the timing and pace of rate hikes from January. Notably, none of the meeting participants expect the first rate hike in 2016, while two more members now see the first hike in 2014. Similarly, only five see the funds rate at 0.25% at the end of 2014, suggesting that at least four of the FOMC members voting for the statement harbor some doubts about the statement’s policy guidance.
That’s evident from the graph of policy projections too, since it is clear that most of the seven members supporting policy firming in 2014 foresee much higher interest rates by the end of that year than we are led to believe by the Fed statement:
Photo: Federal Reserve
According to de Kock, this spells big trouble for the Fed’s attempts at transparency moving forward:
- The disconnect between FOMC’s policy announcement and members’ fed funds rate forecasts underscores deep divisions on the FOMC.
- The FOMC members’ forecasts show sustained misses on the Fed’s dual mandate, highlighting the limitations on the Fed’s ability to achieve its targets.
- The FOMC has tilted more hawkishly through inaction borne of a lack of conviction.
- The FOMC remains data-dependent, but uncertainty about its response to the data should mute the FX impact of incoming releases, consistent with continued noisy range trading rather than the emerging of clear trends.
True, the divergence between the official Fed story and individual committee members’ policy projections is not huge, but changes from the last report to this one do suggest a much larger role for data and the markets than most investors would like. Further, if the Fed can’t keep its story straight, then how can projections or outlooks be trusted?