Exactly when does the Federal Reserve expect to start raising short-term interest rates? The Fed emitted conflicting signals today that could confuse the public and the markets. The source of the confusion is the Fed’s laudable effort to increase what it calls “transparency”—letting people see inside the black box of monetary policy.
Joshua Zumbrun of Bloomberg News flagged this problem even before today’s actions in a strong story referring back to the Fed’s January meeting. The headline: “Fed’s 17 Rate Forecasts May Confuse More Than Clarify.”
Here’s the conflict: In its official statement today, the rate-setting Federal Open Market Committee reiterated that economic conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”
No surprise there. But in the interest of full disclosure, the Fed also released members’ assessments of the “appropriate pace of policy firming” (PDF).
Those individual assessments conflict sharply with the overall committee’s forecast. Only four of the 17 committee members think that it will still be appropriate to have the federal funds rate at 0.25 percent, roughly its current level, at the end of 2014.
From there, the numbers go up and up. Three FOMC members think fed funds should be 0.5 percent at the end of 2014; two think it should be 1 percent; one thinks it should be 1.5 percent; two think it should be 2 percent; one thinks it should be 2.25 percent; three think it should be 2.5 percent; and one thinks it should be 2.75 percent.
Another helpful chart shows that only four of the committee members think “policy firming” should wait until 2015 or after. Seven think it will need to begin in 2014, three in 2013, and three this year.
What’s at work here seems to be a powerful example of groupthink. On their own, a majority of members think the fed funds rate is going to have to go up relatively soon and relatively fast. But when they sit down to vote, they coalesce around the views of the chairman. Probably another factor is that many of the hawks didn’t participate in the vote. Although the committee has 17 members, the regional bank presidents rotate through voting roles. Only 10 of the 17 members voted—with one “no,” from Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, who disagreed that the federal funds rate is likely to need to stay low through 2014.
Led by CNBC’s Steve Liesman, journalists pounced on the FOMC’s inconsistency in the press conference Bernanke gave this afternoon. Bernanke responded that people should pay attention to the committee vote, not the individual projections. “These projections are inputs into a committee process,” he said. “The committee had no difficulty coming to a consensus that the guidance we gave is still appropriate.”
That answer wasn’t entirely satisfying, of course. Greg Ip of the Economist asked exactly what the Fed means when it refers to “exceptionally low levels” for the federal funds rate. Perhaps the Fed has an elastic definition that encompasses substantially higher rates.
Bernanke confessed, “One of the reasons that the language in the statement is sometimes a little vaguer than you’d like is that we’re trying to get a consensus among 17 people [the whole committee], or at least 10 [the voters].” Added Bernanke: “Personally, I think it means something close to where we are now.”