Market Overview

Bernanke Grasps at New Year Positivity

You have to admire his spirit and his “glass is half full” attitude. In the face of horrific economic conditions, Federal Reserve Chairman Ben Bernanke is still able to at least look as if he is treading water.

According to Bloomberg, Bernanke believes that announcing the forecasts for borrowing costs of the Federal Reserve officials will make monetary policy more effective, simultaneously supporting the two-year expansion.

The article goes on to state that, “A decision to reveal forecasts for the federal funds rate starting this month represents the biggest step toward openness since Bernanke took office in 2006 promising greater transparency, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. and a former Fed board economist. The central bank didn't even start announcing changes in interest rates until 1994.”

“This is a complete 180-degree shift from the old mysterious-institution approach,” said Ethan Harris, co-head of global economic research at Bank of America Merrill Lynch in New York. “There's been a steady move toward opening up the central bank to outside scrutiny and trying to explain to the public the logic of what they're doing.”

It is certainly a brave move by Bernanke, and perhaps a smart one in an election year which will see any Republican candidate (insert name when we have it) almost certainly slate the government's running of the Federal Reserve and a perceived lack of transparency. This move will at least give Bernanke something to throw back.

The article states that, “The first forecasts will be announced after the Jan. 24-25 meeting of the Federal Open Market Committee, according to minutes of the Dec. 13 gathering released yesterday. That may boost economic growth by delaying expectations for an increase in the benchmark rate, which has been kept close to zero since December 2008, according to Feroli. At the same time, publishing a range of forecasts risks sowing confusion by showing disagreement among policy makers, Harris said.”

Harris believes, however, that the move could backfire on Bernanke, as he reveals to the public the uncertainty that fills the Fed.

According to Bloomberg, “The decision to publish forecasts “is a part of trying to manage expectations,” said Diane Swonk, chief economist in Chicago at Mesirow Financial Inc., which managed $59 billion as of Sept. 30. “The theory is that if households and companies are convinced that the Fed is not going to tighten too quickly, there is reason to invest now.””

There are concerns that any published forecasts could confuse the public, as there is an “appreciable risk that the public could mistakenly interpret participants' projections of the target federal funds rate as signaling the Committee's intention to follow a specific policy path rather than as indicating members' conditional projections,” though these ceoncerns are largly considered manageable.

Still, Christopher Low, chief economist at FTN Financial in New York, cast doubt on the value of any forecasts when he said that, “The Fed is no better at forecasting than the best market economists, none of whom are right all the time.”

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