Significant New Information Conveyed at the Bernanke News Conference

January 25, 2012

Before the start of today’s press conference, the FOMC had already managed to convey most of the really useful insights into Fed thinking, but a couple of great tips nonetheless were added by Chairman Bernanke.

One should not look at the mean but rather the median of the scatter diagrams of predicted end-year levels of the Fed funds rate by all 17 of the Fed Governors and regional presidents who comprise voting and non-voting members of the FOMC.  All votes count equally, so weighted averages are not appropriate.  Let’s say all but one committee members expect the target interest rate to be unchanged at 0.25% at the end of 2013, but the other person believes its will be at 2.5% by then.  The wide deviation of 2.5% from 0.25% is immaterial.  The outlier is still outvoted by everyone else, so the outcome of the meeting will be no different than if the last person’s projection were a rate of 0.50%, assuming the dissenting vote isn’t coming from an incredibly influential and persistent person analogous to Henry Fonda in Twelve Angry Men.

  • The median end-2012 and end-2013 projected interest rates are both at 0.25%.  Only 3 of 17 expect the rate to be higher than 0.25% at the end of this year, and that figure increases to 6 of 17 at end-2013. 
  • In the case of end-2014, only six of 17 think the rate will be still at 0.25%, and the median rate level is at 0.75%, with eight people predicting a level above 0.75% and eight people expecting the rate to be less than 0.75% at that time.
  • The median longer-term funds rate is far higher than current levels at 4.25%.
  • Whereas 11 of 17 predicted an end-2013 funds rate of 0.25% and three others put the level below 1.0%, there were two estimates of 1.75% to 2.0%.  The wide distance between these submissions and the rest of the pack suggests an indication of where those folks want the rate to be rather than where they think it actually will be.  These are the closet and formal dissenters such as Lacker, who objected to a description of a time period for the likelihood of exceptionally low rate levels.  The wide gap between their view and the rest of the pack, suggests great uniformity in the majority and a lack of influence from those preferring earlier rate normalization.

Another insight spilled by Bernanke is that if inflation and unemployment track over time along the lines of the central tendency of macroeconomic forecasts, it is probable that even more monetary stimulus, perhaps a further extension of the balance sheet of the central bank, will be applied eventually to rectify the slow rates of adjustment.

Finally, while the Fed upgraded economic prospects to a moderate pace of future growth from a modest pace, officials consider recent data to be mixed and are not ready to declare that a more sustained and stronger phase of recovery has begun.  They prefer to assess more data before taking that step.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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