The Fed Unlocks the Door

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In the spirit of openness and transparency, Bernanke and the Fed have a new policy: every quarter The Fed will disclose the projections and expectations about interest rates of seventeen FOMC (Federal Open Market Committee) members. This is a major step for the Fed, having kept its mind private for 94 years. The transparency is welcomed by many economists, but there may also be risks involved. If investors interpret these projections as pledges, it may make it more difficult for the Fed, when necessary, to change policy quickly. In turn, the credibility of the Fed could be threatened.

The first report from the members highlighted that rates will remain low late into 2014 in hopes of stimulating a listless economy.

However, six of the Fed officials predicted rates would rise by the end of 2013. Looking to late 2014, those six were joined by five more with expectations of increased borrowing costs in the range of .25 to 2.75 percent. Six policymakers predicted no change until after 2014.

The officials estimated GDP growth in 2012 will be 2.2-2.7%, down from a projection of 2.5-2.9% last month. For 2013, GDP is estimated to be 2.8-3.2%.
The Fed also announced an inflation target for 2012 below 2% at 1.4-1.8%.

None of this news was unexpected. The Fed statement said they plan to keep borrowing rates low until at least late 2014 and believe that unemployment will remain high and inflation “subdued.” Despite two years of economic growth, the unemployment rate has fallen only modestly and remains at 8.5%. The Fed will continue “Operation Twist” extending the average maturity of its $2.6 trillion securities portfolio. Further, the policy of reinvesting maturing housing debt into agency mortgage-backed paper will continue.