Federal Reserve made several forecasting errors over the past few years. This is one of the reasons, Bernanke thinks Janet Yellen is not raising the rates anytime soon. Will Fed officials be less likely to deliver forecasts on how they see the future?
12 August, AtoZForex – Ben Bernanke, the Central Bank’s former chairman thinks his former colleagues at the Fed will not raise interest rates anytime soon. He thinks that raising rates under current conditions will only lead investors astray.
Janet Yellen is not raising the rates: why?
Partially that’s because most Federal Reserve officials have been wrong on their economic forecasts over the last several years. They expected that economic growth would be stronger, while the natural level of interest rates and the unemployment rate would be higher. Unemployment fell far below the Fed’s target level, the economy has managed steady growth and the stock market levels set new records. Bernanke wrote this week:
“It has not been lost on Fed policymakers that the world looks significantly different in some ways than they thought just a few years ago and that the degree of uncertainty about how the economy and policy will evolve may now be unusually high.”
Are rates seen less urgent?
For the investors, Bernanke said that Fed’ realization that it was too optimistic when forecasting the growth will probably lead to a reluctance to raise rates. Bernanke added to his explanation why he thinks Janet Yellen is not raising the rates:
“With a shorter distance to travel to get to a neutral level of the fund’s rate, rate hikes are seen as less urgent even by those participants inclined to be hawkish. <…> In particular, relative to earlier estimates, they see current policy as less accommodative, the labor market as less tight, and inflationary pressures as more limited.
Moreover, there may be a greater possibility that running the economy a bit ‘hot’ will lead to better productivity performance over time. The implications of these changes for policy are generally dovish, helping to explain the downward shifts in recent years in the Fed’s anticipated trajectory of rates.”
The current year has been rough for Fed forecasts. When Fed raised rates at the December 2015 (first time in 9 years), FOMC members expected four more hikes this year. However, the market expectations are that there will be none and the next likely date for that is June 2017.
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