Federal Reserve Plays Down Own Forecasts for Interest Rate Rise

The Federal Reserve played down predictions by some of its own policy makers that interest rates might rise faster than they had forecast earlier.

“Several participants noted that the increase in the median projection overstated the shift in the projections,” according to minutes of the March 18-19 meeting of the Federal Open Market Committee released yesterday. Some expressed concern the rate forecasts “could be misconstrued as indicating a move by the committee to a less accommodative reaction function.”

U.S. stocks rallied the most in a month while Treasuries pared declines after the minutes eased concern about the timing of future interest-rate increases. Even after rates rise, officials said last month, they might have to be kept at levels considered below normal for longer because of tighter credit, higher savings and slower growth in potential output.

The minutes reinforced Janet Yellen’s message at her debut press conference as chair last month that the interest-rate forecasts of policy makers -- which are displayed as a series of dots on a chart -- are less important than the Fed’s post-meeting statement.

“She was pretty blunt about it, saying ‘Pay attention to the statement, don’t look at the dots,’ ” said Josh Feinman, the New York-based global chief economist for Deutsche Asset & Wealth Management, which oversees $400 billion. “They knew this could be a source of confusion with the dots moving up, and they were thinking about how to manage that.”

Shares Rally

The Standard & Poor’s 500 Index rose 1.1 percent to 1,872.18 at yesterday’s close. The yield on the 10-year Treasury note climbed one basis point to 2.69 percent.

Treasury yields jumped last month after policy makers predicted that the benchmark rate would increase faster than previously forecast and Yellen said rates might start to rise “around six months” after the Fed ends its bond buying.

The Fed in March reduced the monthly pace of purchases by $10 billion, to $55 billion, and repeated it is likely to continue paring the program in “further measured steps.”

“Members agreed that there was sufficient underlying strength in the broader economy to support ongoing improvement in labor-market conditions,” the minutes showed. The FOMC next meets April 29-30.

The committee last month scrapped its pledge to keep the main interest rate low at least as long as unemployment exceeds 6.5 percent, saying it will look at a broader range of data when considering when to increase borrowing costs. Fed officials predicted that the benchmark interest rate would rise faster than previously forecast.

‘General Agreement’

“While there was general agreement that slack remains in the labor market, participants expressed a range of views regarding the amount of slack and how well the unemployment rate performs as a summary indicator of labor market conditions,” according to the minutes. “Several” participants saw reasons to suggest “there might be considerably more labor market slack than indicated by the unemployment rate alone.”

A number of officials said the move up in the rate projections “was arguably warranted” by labor-market improvement “and therefore need not be viewed as signifying a less accommodative reaction function,” the minutes show.

Most wanted to the policy statement to include an “explicit indication” that the new forward guidance doesn’t imply a change in the FOMC’s policy intentions. “Such an indication could help forestall misinterpretation of the new forward guidance,” the record shows.

‘Walking Away’

“The market in March began to price in higher rates sooner than was the case,” said Bret Barker, a bond portfolio manager who helps oversee $132 billion at TCW Group Inc. in Los Angeles. “The minutes are walking away from that, saying don’t look at the dots, focus on our words. We’re taking out the thresholds, but trust us when we’ll say we’ll be on hold for longer than we should be.”

Governor Daniel Tarullo, in a speech in Washington yesterday, said the Fed shouldn’t raise rates “preemptively” on a belief the recession cut the supply of ready labor in the economy.

“We should remain attentive to evidence that labor markets have actually tightened to the point that there is demonstrable inflationary pressure,” Tarullo said. “We should not rush to act preemptively in anticipation of such pressures based on arguments about the potential increase in structural unemployment in recent years.”

The FOMC met by videoconference on March 4 to discuss changes in its guidance for probably path of the benchmark interest rate, according to the minutes.

Outdated Guidance

“Participants agreed that the existing forward guidance, with its reference to a 6.5 percent threshold for the unemployment rate, was becoming outdated,” the minutes showed. “The agenda did not contemplate any policy decisions, and none were taken.”

The economy and employment are showing the steady gains Yellen and her colleagues say are necessary for a wind-down in stimulus. Private employment in March exceeded the pre-recession peak for the first time, a Labor Department report showed last week.

Payrolls excluding government agencies rose by 192,000 workers after a 188,000 gain in February that was larger than first estimated. That brought the job count to 116.1 million, beating the January 2008 high of 116 million. Unemployment held at 6.7 percent, close to a five-year low, even as almost half a million people entered the workforce.

Harsh Weather

The jobs report added to evidence the world’s largest economy is shaking off the effects of harsh winter weather that depressed consumption and disrupted home building and manufacturing in much of the country.

At the same time, Yellen, 67, said in a March 31 speech that the Fed will need to maintain unprecedented accommodation for “some time” because “considerable slack” remains in the labor market. “This extraordinary commitment is still needed,” she said.

The FOMC said last month interest rates will probably remain low for a considerable time after asset purchases end, and that it will weigh a “wide range of information,” including labor-market measures, in considering when to raise the benchmark rate.

Fed officials, in forecasts released last month with the policy statement, upgraded projections for gains in the labor market and predicted the main interest rate will rise to 1 percent by the end of 2015, higher than previously forecast.

Dots, Statement

Yellen, in a news conference following the gathering, played down the importance of the interest-rate forecasts, which are represented as a series of dots on a chart, saying the committee statement is more important.

“These dots are going to move up and down over time,” she said. They moved up “ever so slightly,” she said. “The committee’s views on policy will likely evolve.”

Yellen succeeded Ben S. Bernanke as Fed chief in February after three years as vice chair. In that role, she helped shape communication as the central bank sought to support the recovery from the longest recession since the Great Depression.

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