Federal Reserve Plays Down Own Forecasts for Rate Rise

Policymakers worry the market is overreacting to its interest-rate projections, according to the FOMC minutes.

The Federal Reserve played down forecasts by some of its own policy makers that interest rates might rise faster than they previously predicted.

“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 today. 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 rose 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 reinforce 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.”

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

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 show. 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 said some factors suggest “there might be considerably more labor market slack than indicated by the unemployment rate alone.”

The FOMC met by videoconference on March 4 to discuss forward guidance for the benchmark interest rate, according to the minutes.

“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.

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.

 

Wide Range

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.

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.

Philadelphia Fed President Charles Plosser, who votes on policy this year, told reporters yesterday he is “pretty pleased” with the jobs report for March, saying it “seemed to indicate the effects of weather are diminishing.”

Chicago Fed President Charles Evans, who doesn’t vote on policy this year, said in a March 28 Bloomberg Television interview that economic “conditions are looking pretty good right now,” and the central bank will probably raise rates in the second half of 2015.

While flagging “a weak first quarter in the U.S. due to weather,” Evans said he expects the economy to grow at a 3 percent annual pace for “the rest of the year and into 2015.”

The release of the minutes coincides with the start of earnings season for U.S companies reporting first-quarter results. The reports will help policy makers determine whether recent economic weakness stems from harsh winter weather or fundamental obstacles to growth.

 

Company Sales

Sales by companies in the Standard & Poor’s 500 Index probably climbed during the quarter by 2.9 percent from a year earlier, according to estimates compiled by Bloomberg. The index jumped 30 percent last year, the best performance since 1997, fueled in part by Fed stimulus.

New York-based Alcoa Inc. posted profit yesterday that exceeded estimates and forecast that global demand for aluminum will outstrip production this year. The largest aluminum producer was the first S&P 500 company to report earnings for the quarter.

Miami-based Lennar Corp., the biggest U.S. home builder by market value, saw customer traffic and sales volume rise through the first quarter.

“The fundamental drivers of improvement in the housing market remain a steadily improving economy with a slowly improving employment picture unlocking pent-up demand,” Chief Executive Officer Stuart Miller said in a March 20 earnings call.

 

Bloomberg News

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