Fed rate forecasts as a micro QE3

January 3, 2012

The Fed’s decision to begin publishing policymakers’ own forecasts for the path of policy may effectively constitute a minor easing of the central bank’s already ultra-loose monetary policy at its Jan. 24-25 meeting, according to Harm Bandholz of UniCredit. That’s because in doing so, officials will likely show that they expect the benchmark federal funds rate to remain near rock bottom levels until later than mid-2013 – the Fed’s current guidance on policy.

While the minutes do not say in which direction the forward guidance should be adjusted, we assume that mid-2013 is seen by many FOMC officials as too early. In that context, the decision for Fed officials to publish their projections of the target fed funds rate could provide an opportunity for a back door policy easing in January. If e.g. most participants would not pencil in any rate hike until the end of 2014, the market would certainly take this as a strong signal.

Along the same lines, David Hensley at JP Morgan says:

All else constant, these projections would further flatten the yield curve if the FOMC signals a later start to rate hikes than currently is discounted in markets.

Which is just as well if the Fed’s intention is to keep policy constant, since, as my colleague Mark Felsenthal aptly points out, a stated end-date for exceptionally low rates effectively means that policy is susceptible to a passive tightening with every day that passes.

Investors remain split on the prospects of another round of bond buys, particularly given a better round of U.S. economy data. But for Bandholz, the odds are still in favor of a QE3:

Despite the latest round of better economic numbers, the chances for even further monetary policy accommodation still seem to be quite high.

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