4th January 2012
Having fought shy of predicting future interest rates in the past, the Fed's most senior committee, the Federal Open Market Committee will now publish quarterly its view of where it thinks rates will be at the end of a particular calendar year, and its expectations for future years. It will also give the individual views of all ten committee members.
The Fed will also release a quarterly prediction of when it expects to raise the short-term interest rate.
The news has been welcomed by many commentators who believe it will increase stability for investors and thus help the economy, but there are also some doubters. Some think it could lead to the views of individual members coming under too much scrutiny. Others think the credibility of the Fed is on the line if it makes predictions which are then proved to be very wide of the mark, as surely would have happened during the financial crisis.
The Telegraph quotes Chris Low, an economist at FTN Financial saying: "The Fed is notorious for being caught off guard by economic turning points."
But there are many supporters. On his Washington Post blog Ezra Klein outlines why many commentators have backed the move. "Traditionally, when the Fed makes an interest-rate announcement, it doesn't indicate how long it expects rates to stay at that level, which creates some degree of uncertainty in the market. So if it quietly intends to keep rates low, some individuals or companies who would have invested will sit on their cash because they're not sure the rates will be low. [These changes] will make it easier for those individuals and companies to make their investment decisions," he says.
Forbes contributor Bob McTeer, a former member of the Dallas Federal Reserve is moved to describe this as an "orgy of transparency" and sees a very big downside.
Noting that the press has hailed the change because of the boost to economic activity, he is less sure because of the potential impact on savers. This is because of the impact of long term ‘financial repression'. In other words, measures taken during a recession may come at the price of pain to savers. But he suggests the calculations are very different when those measures involve a long period of low interest rates because of longer term economic uncertainty.
Policymakers need to be careful of not significantly disincentivising saving.