Markets More in Agreement than Fed on Interest Rate Path

Financial-market participants are in closer agreement about where the Federal Reserve will steer interest rates than the central bank’s own policy makers, according to a study by the New York Fed.

Each Federal Open Market Committee participant must make a quarterly judgment about where the benchmark rate should be over the next few years. The forecasts are displayed as dots on a chart dubbed the “dot plot.” New York Fed researchers studied policy makers’ forecasts as well as those of primary dealers, which trade securities directly with the Fed.

“While there is some dispersion among primary dealers’ forecasts, FOMC members have disagreed considerably more over the past three years,” the authors wrote in a blog post. “We should expect the FOMC to disagree more because private forecasters attempt to predict the most likely policy outcomes, whereas FOMC members report their views.”

Fourteen of 17 officials see the fed funds rate rising above zero some time next year, according to the latest projections released on Sept. 17. The rate was last raised in 2006. The forecasts don’t give more precise dates for so-called liftoff.

Predictions of where rates will stand on Dec. 31, 2015 ranged from 0.125 percent to 2.875 percent, implying different views on the appropriate pace of tightening. The median estimate increased to 1.375 percent in September from 1.125 percent in the previous set of forecasts released in June.

Considerable Time

The projections accompanied the Fed’s post-meeting statement, in which the central bank retained a pledge to keep the fed funds rate near zero for a “considerable time” after asset purchases end, most likely next month.

The key to understanding the FOMC dots is “they are not forecasts, but policy recommendations,” say the blog’s authors, Richard Crump, Stefano Eusepi, and Emanuel Moench of the New York Fed and Troy Davig, research director for the Kansas City Fed.

“Ultimately, all participants are aiming for an inflation rate of 2 percent and full employment in the long run, though their policy prescriptions to achieve these objectives may look quite different,” they wrote.

The dots are anonymous, so investors can’t distinguish between forecasts of officials who currently vote on policy and those who don’t vote. Fed Board members, including Chair Janet Yellen, have permanent votes along with the New York Fed president, while presidents of the 11 other regional Fed banks rotate.

Yellen, in her press conference on Sept. 17, declined to identify her own forecasts, although she said that the Summary of Economic Projections was the subject of a review by a Fed panel on communications led by Vice Chairman Stanley Fischer.

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