One of the hallmarks of Ben Bernanke's tenure as chairman of the Federal Reserve board has been a push for more transparency. From press conferences to more speeches to extra disclosures, Bernanke has been much more open about the Fed's operations than his predecessors. The latest chapter in this push was the publication of the Fed's detailed economic forecast and each voting member's expectations for the future path of interest rates.
It's certainly hard to argue against greater openness about what the Fed is doing, but the actual utility of these moves to individual investors is, at best, limited.
The numbers that the Fed released last week weren't exactly earth-shattering projections. The range of estimates for long-term GDP growth in the United States are, brace yourself, 2.2% to 3.0%. They expect growth might be over that trend in 2013 and 2014 but, generally speaking, the Fed thinks the future on average is going to look a lot like the past. Inflation should also be about 2.0% over the longer run. I guess it is good to know that the Fed isn't planning on stoking hyperinflation anytime soon!
On the jobs front, the Fed board members think the U.S. structural unemployment rate will be around 5% to 6%, but that even by 2014 we'll still be a good distance away from there (range of 6.3% to 7.7%). It's sobering to see how long the job market could take to fully recover, but the fact that the employment market is in a serious funk is hardly a shock.
By far the most interesting part of the report was the Fed's explicit discussion of when it expects to begin tightening monetary policy. Three members of the FOMC think policy should be tightened this year, three are aiming for 2013, five for 2014, four for 2015, and two for 2016. We had already known the consensus at the Fed was to keep rates low for at least another two years, but now we know that some members don't want to touch rates for another four years.
Seeing how these reports move over the next year might give us some extra insight as to the likelihood of more easing or when rates might start to tick back up--or they might not. These projections are just that, projections. The chances of the world actually playing out over the next five years as the Fed expects are very small. This isn't a knock on the Fed's economists--they are some of the best in the business--but trying to figure out exactly what the broader economy is going to look like that far out is near impossible. Look at how hard it is to predict what the economy will look like quarter-to-quarter. And it wasn't like investors had no idea before: The Fed was doing a pretty good job of previewing future policy before it made the disclosure changes (look at Bernanke's speeches leading up to QE2), and that is not likely to change.
You don't have to go back too far to see how wrong the Fed can be. The housing bubble is the prime recent example. The Fed was convinced that the subprime crisis was contained and that it would not result in any spillover to the broader economy. There were even members of the board who hoped that the housing bust would help free up capital for other sectors of the economy, creating a net positive for growth. They were wrong. The Fed didn't see how widespread the housing problems were and how derivatives had interconnected the global banking system.
Once the Fed saw the crisis unfolding, the central bank reversed course and acted quickly to stem it. This isn't a criticism. It is admirable that when the FOMC saw the facts on the ground changing, they were able to rapidly react and not feel anchored to their previous thinking. In the end, the Fed's actions were crucial in keeping the economy from totally collapsing. And this level of flexibility is going to remain, even with the new data. Bernanke has made it clear that he will continue to keep all of his options open and be ready to act when it is appropriate.
And there will almost certainly be shocks to the financial system over the next few years that the Fed is not adequately accounting for right now. Perhaps commodity prices will shoot up or a hard landing in China will derail world growth. The Fed could even be misestimating the potential of the European crisis to spill over to the United States. And that doesn't begin to consider natural disasters and political shocks.
So given that the path of monetary policy can still change on a dime, investors shouldn't spend too much time reading the tea leaves of each new projection. It's a glimpse into what some of the FOMC members are thinking, but it is hard to see why it should have a special impact on a long-term investment strategy.
What do you think? Are you planning on following the Fed's forecasts? Do you think there is a utility to releasing this information?
Bearemy Glaser is the bearish alter-ego of Morningstar markets editor Jeremy Glaser. Each week, Bearemy shares what's topping his list of concerns and invites you to reply or add your own in the comments section below.
