COMMENTARY OK, we get it, Ben: You are no Alan Greenspan. In an effort to reverse the legacy of Greenspan's murky, obscure communication, Federal Reserve Chairman Ben Bernanke has tried to increase the central bank's transparency. You had to know this was a different kind of guy when he appeared on 60 Minutes. He sounded almost normal when he testified before Congress, which allowed me to, once and for all, throw out my Greenspan decoder ring.
Last year, Bernanke started holding quarterly press conferences after every other meeting of the Federal Open Market Committee, the branch of the Fed that sets monetary policy. Bernanke now must field questions from hard-hitting financial reporters, and he did pretty well. Furthering his mission to help us understand what's going on at the Fed, Bernanke has added a new twist -- providing detailed forecasts on the direction of interest rates.
The Fed will keep its key short-term interest rate at 0-0.25 percent, where it has been for more than three years and where the central bank says it is likely to remain at least through late 2014. Previously, the Fed had said that it would keep rates exceptionally low through mid-2013. The Fed said nine out of the 17 officials (5 board presidents and 12 board members) taking part in its policy-making committee expect rates to stay at or below 0.75 percent until the end of 2014. When will rates rise? Nine officials think the first rate increase will occur in 2014 or 2015, while six believe increases will start in 2012 or 2013.
Ultra-low rates have helped goose stock prices and kept interest rates low, but they haven't exactly pumped up the overall economy. Last year, GDP growth was 0.4 percent in the first quarter, 1.3 percent in the second, and 1.8 percent in the third. We'll get the first estimate for the fourth quarter later this week, but most economists think it will be 3 percent. That would mean U.S. growth for 2011 was sub-two percent. No wonder we still have over 13 million people out of work!
Don't worry, though. The Fed says that growth will improve over the next few years. This year, the economy is expected to grow between 2.2 percent and 2.7 percent, down from November's forecast of between 2.5 percent and 2.9 percent. The gradual improvement in growth should help the unemployment rate drop to 8.2 percent this year, which would be an improvement from November's rate of 8.5 percent.
But given the Fed's dubious track record of predictions, should we take stock in their forecasting abilities? When the FOMC transcripts for 2006 were recently released, there were some notable quotes from a range of officials expressing confidence in the housing market, proving that the Fed geniuses can get it wrong just like the rest of us. For instance:
- "The bottom line is that overall mortgage credit quality is still very, very strong." (Bies)
- "Housing is a relatively small sector of the economy, and its decline should be self-correcting." (Yellen)
- "The excesses in the housing sector seem to be unwinding in an acceptable way." (Mishkin)
- "We just don't see troubling signs yet of collateral damage, and we're not expecting much." (Geithner)
- "I'm still fairly skeptical of large indirect spillover effects on employment or consumption." (Lacker)
- "We are not projecting large declines nationwide in house prices." (Fed staff)
- "I think we are unlikely to see growth being derailed by the housing market." (Bernanke)
My all-time favorite Fed quote comes from Greenspan, who led the Fed from 1987 to 2006. In February 2004, he said, "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage." I think we all know how those adjustable-rate mortgages worked out.The takeaway is that while these forecasts may help a short-term trader make a decision, it's hard to see how a long-term investor would benefit by changing her strategy based on what the Fed thinks might happen.