Wednesday, January 25, 2012

Fed's low rate statement is not a pledge

There is no shortage these days of mainstream media misinterpreting current financial and economic events. The Fed's action today in fact created just such a misunderstanding.
Forbes: Wednesday’s Fed pledge to keep rates low for even longer helped perk up a stagnant market. About forty minutes after the statement and just over an hour to the Bernanke presser, the Dow Jones industrial average was up 36 ...
In fact there is no "pledge" from the Fed, and Bernanke made that point quite clear in his news conference. This is what was actually in the Fed's statement:
Fed Statement: ...the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
The FOMC survey indicates that the Committee members on average think that rates will stay low in 2014 because of slow economic growth. But the members are somewhat divided on that view as the scatter plot below shows. This is the Fed's forecast, which provides guidance for rates going forward and not any sort of commitment or a "pledge".

Target Federal Funds Rate at Year-End- FOMC survey (source: the Fed)

Here are the averages of the FOMC projections based on the scatter plot above.

Source: Capital Economics
There is no indication from this forecast that the Fed is absolutely committed to keep the target rate at 0-25bp through 2014.
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