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miércoles, 25 de enero de 2012

The Federal Reserve keeps on giving. The central bank takes another big leap in its communications strategy today with the release of forecasts for short-term interest rates. In its statement earlier today, the Fed showed the result of those new disclosures: it now expects interest rates to stay near zero “at least through late 2014,” well past the prior mid-2013 guidance.

The central bank will release the latest interest-rate and economic forecasts at 2 p.m. showing a distribution of when the 17 Fed policymakers expect the first rate increases, which should tell us more about any consensus around the late-2014 guidance. It will also provide projections of where officials expect short-term interest rates to be at the end of each of the next few years.

But wait, there’s more: Fed Chairman Ben Bernanke takes the floor around 2:15 p.m. to explain all of this in his regular press conference. We’ll be live-blogging it here.

  • A reporter from Agence France-Press asks: Would the Fed lend to the International Monetary Fund, if the global crisis worsens, as it's done with foreign banks over the years?

    Bernanke says lending to banks is part of the Fed's "raison d'etre" (you like how he did that, answering a French reporter's question?) but lending to the IMF is not. "Committing funds to the IMF I don't think is within the purview of the Federal Reserve," he says. That belongs to the administration and the Congress.

  • How should we read the FOMC statement vs. the new projections? The decision on policy is ultimately made around the table through a discussion and a collective determination, Bernanke says. "We have a meeting for a reason, which is to talk to each other" and come to a consensus. The projections, he says, should give significant information about where the FOMC is likely to go."

  • Bernanke rejects any suggestion that the Fed, with its new guidance, will change its approach to monetary policy. "We are a dual mandate central bank. We put equal weight" on price stability and employment. Even among other central banks, "even central banks that call themselves inflation targeters typically pay at least some attention to other parts of the economy."

  • Don't these new forecasts show the Fed is missing its targets? By our count, that's the third question along those lines today. Bernanke engages in a brief defense, noting that it's done a lot already -- including through programs in recent months. But he says all these questions make good points.

    "We need to adopt policies that will both achieve our inflation objectives and help the economy recover as quickly as is feasible," he says, adding: "We need to be thinking about ways to provide more stimulus if we don't get some improvement" in the economy.

  • Is there a risk of a backlash from the Fed's new information, particularly by hurting confidence by suggesting the economy is weaker than people think?

    "Those considerations are outweighed by the need to maintain accommodative conditions," Bernanke says, so it's attractive for firms to invest and hire, and for individuals to buy homes.

    He says markets and the news media are good at analyzing turns in the economy on their own. "I wouldn't overstate the Fed's ability to massively change expectations through its statements," he says. "While we certainly take that into account, we think it's important for us to say what we think" and provide the right amount of stimulus to help the economy recover.

  • The Fed on housing and mortgage concerns: The Fed recently released a paper on this, drawing some attention. "It's important to say that our intent in that whitepaper was to provide the benefit of our analysis to the public" and policymakers, without taking specific stands, Bernanke says. The Fed did discuss refinancing and principal forgiveness. The latter could be helpful but also has potential drawbacks, such as the fact that negative equity in the country is about $700 billion. So the question is what to do with a smaller amount of money, like $25 billion.

  • What other innovations could we get down the road from the Fed's projections? Bernanke says nothing specific has been decided. But he says, for instance, the Fed could provide more information about the relationship between individuals' policy preferences and their forecasts.

    He says suggestions are welcome, so get that letter-writing campaign started today.

  • The Fed only offered guidance about interest rates, even though the Fed has been using extraordinary means -- its balance sheet -- to conduct monetary policy. Why is there no new information about the size of the Fed's balance sheet?

    Just wait for the minutes, Bernanke says. That'll come in a few weeks, once the Fed has a chance to summarize the qualitative discussion at its two-day meeting.

    But Bernanke does throw us a bone: "Expanding the balance sheet remains an option" if progress toward full employment became "inadequate" or inflation became exceptionally low, he says.

    Moving the rate-hike projection to late 2014 does imply, he says, that initial sales of assets in the Fed's portfolio will be "later than previously thought ... presumably in 2015."

  • A political question: Bernanke has seen some hostility coming from the GOP presidential debates. What do you think? And what if a new GOP president asked you to resign -- would you?

    Bernanke: "I'm not going to get involved in political rhetoric," he says. "I have a job to do" to help the Fed achieve its dual mandate on employment and price stability.

    The questioner suggested some GOP animosity could come from displeased Americans living on their savings. Bernanke's core message: "The savers in our economy are dependent on a healthy economy in order to get adequate returns," he says.

  • And now, a question about the bouncing dots. Which one is the Fed chairman? Bernanke indicates they aren't disclosing the identities for a reason, to ensure discussion at meetings.

    This is all part of a long-running effort by Bernanke to depersonalize monetary policy. The Fed chairman won't be around forever, he says, while other officials will stay there. The average Fed bank president's term is 10 years, and governors can serve for 14 years. "Even as the chairman changes, much of the FOMC remains continuous."

  • How much confidence do you have about forecasting the economy and rates three years out? At least he's honest: "Our ability to forecast three and four years out is obviously very limited," Bernanke says. "Nevertheless we have to make a best guess, a provisional plan" much like a firm would. "It's certainly possible we will be either too optimistic or too pessimistic," he says, which means the Fed could have to adjust as a result.

  • What does the Fed see for long-run unemployment? It's now 5.2% to 6%, higher than it was some years ago. Bernanke cites structural issues and high long-term unemployment for pushing up the natural rate. "Clearly at 8.5%," he says, "we're above anybody's estimate."

  • Now it's on. The forecasts could suggest more policy action is merited, and Bernanke suggests there may be a case for that. But more disclaimers: "We're not going to mechanically take the interest-rate projections ... and build policy off of that."

  • Now we're onto questions. The first one is essentially, is the Fed doubting the economic improvement that we've seen? Bernanke notes improvement in some areas, but "mixed results" in others. Among them: "We continue to see headwinds emanating from Europe, coming from the slowing global economy," he says. "I don't think we're ready to declare that we've entered a new, stronger phase at this point. We'll continue to look at the data."

  • Here's a new game you can play with Fed policy documents: follow the bouncing dots. The Fed's chart outlining the timing for policy tightening (see page 3 of this PDF) includes plenty of dots. Soon, we'll be guessing which one belongs to Bernanke.

  • Bernanke will be doing this a lot in discussing the new guidance: these aren't firm commitments, but consider them to be forecasts that can change over time.

  • Our colleagues have this rundown of the Fed's new forecasts for interest rates and the overall economy. One key takeaway: Nine of the 17 policymakers see the fed-funds rate to stay at or below 0.75% until the end of 2014. (It's been between zero and 0.25% since December 2008.)

  • Bernanke is opening with what we'll consider a cross between a disclaimer and a lesson on the basics of monetary policy: here's how to think about these projections, but be careful about how much your read into it. (See the Fed's statement about its longer-run goals here.)

  • Bernanke must be feeling like a pro at this point. This is his fourth press conference.

  • If you're following the presidential race, you might care what unemployment will look like around the November elections. The Fed expects it between 8.2% and 8.5% at the end of 2012. That's somewhat better than the projection from a few months ago.

  • Among the new information we just got from the Fed: when the 17 policymakers think interest rates should start rising. What's interesting is that six out of the 17 don't expect a rate hike before 2015 -- four see it that year, and two see it in 2016. (On the other end, three officials each fall into the 2012 and 2013 camps.) The other five see the first rate increase in 2014.

  • In the FOMC statement, the Fed already offered the big news coming from its new projections: interest rates will stay near zero at least through late 2014. We'll get more detail after 2 p.m.

  • Welcome, Fed followers. Interest rates have been near zero for three years, but FOMC day keeps getting more and more exciting. We're here for you.

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