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Fed to regularly forecast interest-rate changes
David Jones, an economist who has written several books about the Fed, said the decision to regularly update the public on expectations for interest rates carries some risk. If the Fed must alter its rate forecast in response to changes in the economy, it could lose credibility with investors.
The Fed’s plan for more explicit guidance on interest rates follows other steps to make the central bank more transparent that began under Chairman Alan Greenspan and accelerated under the current chairman, Ben Bernanke.
Last year, Bernanke became the first chairman to hold regular news conferences. He has also sat for televised interviews and held town-hall meetings.
Not until Greenspan’s tenure did the Fed even announce any changes in its benchmark rate. Until then, financial firms had to study the Fed’s purchases of Treasurys in the bond market to try to determine whether it was raising or lowering rates.
Previous chairmen tended to think the Fed operated best when it could keep financial markets guessing.
The announcement of the new communications strategy had little impact Tuesday on Wall Street. Stock markets had surged earlier in the day on positive manufacturing news in China, India and the United States. Stocks maintained those gains after the Fed minutes were released.
The Dow Jones industrial average ended the day up 180 points, and broader indexes also closed higher.
The U.S. economy is beginning the year after finishing strong in 2011. The Institute for Supply Management said Tuesday that U.S. factories enjoyed their best month of growth in December since late spring.
And the struggling construction industry spent more on projects in November for the third time in four months, the Commerce Department said.
The reports correspond with other brightening signs. Consumer confidence is up, unemployment benefit applications have tumbled and the unemployment rate is at a 3½-year low. Most economists predict growth accelerated in the final three months of last year.
In the minutes released Tuesday, the Fed said it would also include a “narrative” to describe factors that influenced its interest-rate forecast. And the forecast will include information on officials’ expectations for changes in the Fed’s balance sheet.
The central bank began aggressively buying long-term Treasury bonds and mortgage-backed securities at the height of the 2008 financial crisis. The purchases, intended to boost the economy by driving rates down, swelled the Fed’s balance sheet to a record $2.93 trillion.
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