Move marks big step in Bernanke's promise for greater transparency

Federal Reserve Chairman Ben S. Bernanke is betting that announcing Federal Reserve officials' own predictions for borrowing costs will make monetary policy more effective while also supporting the two-year expansion.

A decision to reveal predictions 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 US 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.

"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."

The first forecast will be announced after the Jan 24-25 meeting of the Federal Open Market Committee (FOMC), according to minutes of the Dec 13 gathering released on Tuesday. 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 predictions risks sowing confusion by showing disagreement among policymakers, Harris said. "It's a bit awkward. You're going to reveal to the public how much uncertainty the Fed itself has about where it's going," Harris said.

The minutes said "a number of members indicated that current and prospective economic conditions could well warrant additional policy accommodation". Those members also decided "any additional actions would be more effective if accompanied by enhanced communication" about the FOMC's longer-run economic goals and policy framework.

The decision to publish predictions "is a part of trying to manage expectations", said Diane Swonk, chief economist at Mesirow Financial Inc. "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."

Central bankers in August decided to replace their statement that interest rates would stay near zero for an "extended period" with a date of mid-2013. Bernanke said at his Nov 2 news conference that the statement "says at least mid-2013" and that "clearly it could well be some point beyond that".

Some Fed officials voiced concerns at last month's meeting that publishing the predictions will "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", according to the minutes.

While "most participants viewed these concerns as manageable", some Fed officials "did not see providing policy projections as a useful step at this time", the minutes said.

Releasing the predictions will also demystify officials' abilities to predict the economy's path, according to Ward McCarthy, chief financial economist at Jefferies & Co in New York. "You run the risk of every other forecaster, and that is of making an idiot out of yourself," McCarthy said.

The increased disclosure may make monetary policy "less flexible" if markets perceive the Fed as committed to a particular path of action, said Christopher Low, chief economist at FTN Financial. "The Fed is no better at forecasting than the best market economists, none of whom are right all the time," Low said, adding that "it will be harder for the FOMC to change direction quickly if it means there is a risk of embarrassment or diminished credibility when they do so".