Fed feeds up rate expectations

The United States Federal Reserve is all set to permanently change the way it uses monetary policy to influence the economy and expectations of stakeholders from policy makers. According to the minutes of the Federal Open Market Committee (FOMC) meeting on December 13, 2011, "Participants decided to incorporate information regarding their projections of appropriate monetary policy into the SEP beginning in January". Put simply, members of this committee, which sets the US Fed rate, will provide projections for the same rate in the fourth quarter of this year as well as future years. "All 17 members of the rate-setting FOMC will also forecast when they expect interest rates to rise for the first time," reported the Financial Times on Tuesday. The move is a part of continuing efforts to enhance transparency and accountability of monetary policy. Economists have hailed this announcement as a positive development for bolstering confidence of the private sector. "This will make it easier for the Fed to shock the market as it will have a very good idea of what the market expects," a prominent economist told BR Research. He also added, "Instead of shocking the economy about current rates now, the Fed can shock the economy on future rates now." But these overtures that are to be finalized over the next few days also highlight the helplessness of the Federal Reserve. The benchmark rate is already near zero percent so the authority has little opportunity to lower rates further to encourage growth. On the fiscal side, Democrats and Republicans remain in strong opposition to each others priorities regarding spurring growth through public spending and reigning in the budget deficit. Politicians inability to enact meaningful, comprehensive and timely policies to provide fiscal stimuli has borne down on the effectiveness of monetary stimuli as well. "This shows that policy makers in the United States are scared by their inability to break the fiscal lock," commented another economic expert. He highlighted that the Federal Reserve has recently stepped up projections on economic growth, job creation and other macro-economic indicators. The most recent decision viewed in this context shows that the Fed has so far achieved limited success in its efforts to bolster confidence by providing more insight into future policy decisions. Experts appear to be in concurrence over expectations of further volatility in global markets during 2012. While the steps announced by the Fed in its latest moot can help ease some nerves, the overall economic situation in the US will likely remain tense until structural changes can be enacted to address fiscal imbalances there.