Interest-rate forecasts the U.S. Federal Open Market Committee is set to publish after its March meeting could differ “slightly” from those issued at the end of last year, according to Federal Reserve Bank of San Francisco President John Williams.

There “could be a tweak here or there” in projections known as the dot plot, Williams told reporters Wednesday in San Ramon, California.

“While first-quarter GDP growth was weak, growth in coming quarters is still predicted to be robust,” Bullard said, referring to gross domestic product. “The average quarterly pace of growth in 2014 may still be an improvement relative to 2013,” he said. The average pace of quarterly growth in 2013 was 2.6 percent.
The St. Louis Fed official told reporters after his speech the recent pickup in U.S. employment is “very encouraging.” Unemployment will probably fall below 6 percent by year’s end, setting the stage for the first Fed tightening at the end of the first quarter in 2015, he said.
“Inflation may be moving back to target as the committee has been predicting,” Bullard said. The Fed’s preferred measure for price increases may rise to 1.6 percent by the fourth quarter, he said.

The FOMC has said that, under its current monetary policy stance, it expects the unemployment rate to decline gradually to desirable levels. It has said too that it expects inflation to move back toward 2 percent over the medium term. By easing monetary policy relative to its current stance, the FOMC could facilitate a more rapid fall in unemployment and more rapid return to 2 percent inflation. Hence, the Committee could do better with respect to both of its congressionally mandated objectives by adopting a more accommodative monetary policy stance.

With the potential for inflation expectations to be more volatile in the face of energy and commodity price shocks, I think it could be an opportune time for the FOMC to be more specific and publicly announce an explicit numerical inflation objective. Establishing an explicit inflation objective would clearly communicate our policy intentions and affirm our resolve to achieve price stability. It would also help the public to better evaluate the effectiveness of our actions as events unfold.

Later today, with the release of the minutes of the most recent FOMC meeting, we will be making an additional significant enhancement in Federal Reserve communications: To supplement the current economic projections by governors and Reserve Bank presidents for the next three years, we will also publish their projections of the longer-term values (at a horizon of, for example, five to six years) of output growth, unemployment, and inflation, under the assumptions of appropriate monetary policy and the absence of new shocks to the economy. These longer-term projections will inform the public of the Committee participants' estimates of the rate of growth of output and the unemployment rate that appear to be sustainable in the long run in the United States, taking into account important influences such as the trend growth rates of productivity and the labor force, improvements in worker education and skills, the efficiency of the labor market at matching workers and jobs, government policies affecting technological development or the labor market, and other factors. The longer-term projections of inflation may be interpreted, in turn, as the rate of inflation that FOMC participants see as most consistent with the dual mandate given to it by the Congress--that is, the rate of inflation that promotes maximum sustainable employment while also delivering reasonable price stability. This further extension of the quarterly projections should provide the public a clearer picture of FOMC participants' policy strategy for promoting maximum employment and price stability over time. Also, increased clarity about the FOMC's views regarding longer-term inflation should help to better stabilize the public's inflation expectations, thus contributing to keeping actual inflation from rising too high or falling too low.

In my view, the length of the forecast horizon is particularly relevant at the current juncture in considering the projections for output growth and unemployment.  Because of the recent adverse shocks to the economy--including turmoil in financial markets and the sharp increase in the prices of oil--output growth in recent quarters has fallen below potential, and the unemployment rate is, as best as I can judge, above the natural rate.  Similarly, sharp increases in the prices of many commodities have driven inflation above rates consistent with price stability.  Even under appropriate monetary policy, Committee forecasts of inflation, output growth, and unemployment might not settle at their respective long-run rates within the three-year horizon, obscuring Committee participants' views about these key parameters.

This problem may currently be somewhat less acute for the current set of inflation projections, because inflation is projected to moderate to about 2 percent or below by the end of the projection period.  Nevertheless, to the extent that some slack in economic activity is projected to persist through 2010, that slack might well induce a modest further decline in inflation, implying that policymakers' projections for inflation in 2010 might be a bit higher than their assessments of the mandate-consistent inflation rate. 

The FOMC has chosen not to announce such a quantitative guideline, although many past and current participants on the Committee have expressed individual preferences or “comfort zones” about ranges of inflation that they personally feel are appropriate objectives for policy. Within the past year, the FOMC has started publishing the ranges and central tendency of the inflation forecasts of the participants on a three-year horizon. These forecasts generally have been consistent with the revealed “comfort zones.” In the media, midpoints of these forecasts are often associated with an implicit FOMC objective for trend inflation. This represents important progress concerning the transparency of the FOMC inflation objective. Still, there is some risk that if the evolving inflation situation appears inconsistent with the inflation objective that is inferred from the revealed preferences of the individual FOMC participants, the anchor for inflation expectations may start to drag or come completely loose.

Now let us take a brief look at the Federal Reserve's macroeconomic projections for 2007 through 2009. These projections are useful for understanding the Federal Reserve's near-term policy strategy, and again, I would like to highlight how this strategy fulfills the dual mandate and embeds key implications of the modern science of monetary policy.

The science emphasizes that monetary policy makers need to think in terms of a plan for the appropriate paths for inflation and economic activity that best promotes the dual mandate of price stability and maximum sustainable employment. If economic activity is well below its maximum sustainable level, then monetary policy should aim at increasing output and employment toward sustainable levels. If inflation is above the mandate-consistent rate, monetary policy should aim at reducing inflation to that rate. Providing projections for the short run as well as for the longer run encourages FOMC participants to think in terms of desirable paths for inflation and output, a discipline that the science suggests will produce better policy outcomes. In addition, the projections provide households and businesses with information that can help them understand what the monetary authority is trying to achieve, thereby increasing the likelihood of good economic outcomes.

Just as an analytical risk-management framework is fundamental to the safe and sound operation of large banking and financial institutions, it is also, I believe, essential for sound monetary policy-making. 

The Federal Open Market Committee recently announced that it will increase the frequency and expand the content of its economic projections.  A clear understanding of the risk-management framework should help improve the public's comprehension of these expanded announcements and thereby, I believe, improve the efficacy of monetary policy actions and the overall functioning of the economy. 

"You need to take this next evolution in the communication strategy pretty much on its terms," Poole said. "What's appropriate to read into it you and I won't know until we have some experience with it," and that could take years.   

Poole cautioned observers that under the new strategy, "there needs to be a lot attention paid not so much to the forecast itself but how it has changed from the previous forecast, and what are the events that led to that change."  Because future economic events are so frequently surprising, what's more important is that observers use the forecasts to divine the pattern by which central bankers react to data. 

"We can't tell you what we are going to do because we can't predict the information that is going to determine what we are going to do," Poole said.  But, "over time these quarterly updates to the outlook will enable analysts to connect the change in the outlook to the change in the policy stance," Poole explained.

As reported by Dow Jones News

My own view is that we are approaching the limits of purely qualitative communication and should consider the inclusion of quantitative information presented in a clearly specified framework. For example, like policymakers at many other central banks, the FOMC could specify its long-term inflation objective and include explicit economic forecasts, conditioned on alternative assumptions, in its statements or in regular reports. That being said, one must recognize that the FOMC is not a "unitary actor," as the political scientists term it, but a committee of nineteen highly independent people. With the best will in the world, achieving a Committee consensus on a detailed forecast (for example) will always be difficult in the short time available. Some ambiguity in the FOMC's communications may therefore be unavoidable.

To move substantially further in the direction of inflation targeting, should it choose to do so, the Fed would have to take two principal steps: first, to quantify (numerically, and in terms of a specific price index) what the Federal Open Market Committee means by "price stability", and second, to publish regular medium-term projections or forecasts of the economic outlook, analogous to the Inflation Reports published by both inflation-targeting central banks.