FUTURE MORTGAGE INTEREST RATE CRYSTAL BALL?
The Federal Reserve’s decision three years ago to reduce short-term interest rates to nearly zero made a splash, both because the Fed had never pushed rates so low and because it said that it planned to keep rates near zero “for some time.”
Predicting its own future actions was a new step, an experiment in a time of crisis that the Fed has since repeated several times, most recently in August, when it said that it planned to keep interest rates near zero until at least the summer of 2013.
Now the technique looks increasingly likely to become a permanent method for influencing economic growth. When the Fed’s policy-making committee convened last Tuesday, it considered the idea of publishing a regular forecast of its future decisions on interest rates. Any such plan would most likely be announced no sooner than its next meeting, in January, when it is already scheduled to publish economic projections.
Forecasting policy is part of a broader set of changes that the Fed is considering to improve public understanding of its methods and goals. The Fed’s chairman, Ben S. Bernanke, and other officials say that improved communications could deliver a modest boost to the economy with relatively little risk. None of their other options for additional action are nearly so appealing.
“We are actively considering methods that we could use to provide greater clarity,” Janet L. Yellen, the Fed’s vice chairwoman, said after a recent speech in San Francisco. “Is it a game-changer? I feel that it could have some favorable impact. I don’t want to exaggerate how large that is.”
The meeting of the Fed’s policy-making committee on Tuesday came at a moment of unusual uncertainty about the plans of other economic policy makers.
Congress is debating the extension of a payroll tax cut and unemployment benefits, which some forecasters estimate could lift economic growth next year by more than one percentage point. Europe is convulsing, and Mr. Bernanke is among the economists who have warned that the United States could slip back into recession if the euro collapsed.
Recent federal data suggest that the United States economy is improving somewhat, reducing the pressure on the Fed to expand its aid programs. Even though unemployment remains at a level that Fed officials regard as unacceptable, most analysts who follow the central bank say they did not expect major changes in policy at this meeting.
Another round of asset purchases remains a possibility — including a specific investment in mortgage-backed securities — but officials are concerned that the benefits diminish with each new round, while the risks, both economic and political, have increased.
Monetary economists had long agreed that central banks should avoid making predictions or commitments. They worried that deviations from the predicted path would create costly turbulence in financial markets as investors corrected their misconceptions.
In recent years, however, more policy makers have concluded that the power to shape expectations should be embraced. Some central banks have come to regard speaking about the future as a primary policy tool. For example, the central banks of Britain, Canada and Australia, among others, have adopted explicit goals for inflation and the rate of increase in prices and wages. The central banks of Sweden and Norway publish forecasts of the level of interest rates. New Zealand announces goals and forecasts.
Mr. Bernanke is a longtime advocate of setting an inflation objective. But Congress has given the Fed a dual mandate to manage inflation and unemployment, and past proposals to formalize an inflation goal have foundered on the question of how to communicate an equal concern about the health of the labor market. This remains the subject of lively debate within the Fed.
Predicting the future is less controversial. The minutes of the committee’s most recent meeting, in November, said that “participants generally expressed interest in providing additional information to the public about the likely future path of the target federal funds rate.”