One of the key themes of the Federal Reserve under Chairman Bernanke has been the increase in transparency concerning central bank operations. Greater clarity about policy-making should decrease the uncertainty concerning interest rates and lead to smoother functioning markets. To reach this goal, the Fed announced yesterday that it would increase the number of forecasts from two to four a year. The forecast projections will also be extended to three years from two. Along with these forecasts will be greater explanation and summaries of the numbers. There will also be more detailed descriptions of the risk concerning the forecasts
As stated in the press release, “These descriptions will provide a fuller discussion of the projections, covering not only the outcomes that most meeting participants see as most likely, but also the risks to the economic outlook and the dispersion of views among policymakers.”
The first of these new information packages will be presented on November 20th. You could not ask for a more interesting time to provide more information on Fed thinking. With the current credit and housing crisis still working through the economy, there is a lot of uncertainty on what will be the direction of growth in 2008. While there is general agreement of a slowdown, the size is still uncertain and the potential response of the Fed is also unclear.
Providing more information is a positive, but it will have to digested and discounted by the market. New information is by definition surprising and uncertain information. We also know that the quality of the Fed forecasts are not really better than what we see from other forecasters. It is not clear whether we are better off with three year projections other than we will know what the Fed is basing their decisions.
We expect there will be a strong initial market reaction to the release on the 2oth but ultimately not much change in market directions.
http://www.federalreserve.gov/newsevents/press/monetary/20071114a.htm
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