Trying to read between the lines of the Fed rate message

Tue Jan 31, 2012 12:13am EST
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By Jonathan Spicer

NEW YORK (Reuters) - For a central bank that wants to make transparency its hallmark, the Federal Reserve's new forecast of nearly three more years of super-low rates has left room for a few doubts.

The Fed surprised markets last Wednesday when it extended its previous forecast for keeping its key interest rate "exceptionally low" until at least late 2014, more than a year longer than its previous guidance.

Ninety minutes later, the U.S. central bank published charts showing that more than a third of its policymakers expected a rate rise before 2014, whiplashing bond markets.

The difference in tone between the dovish statement of the Fed's policy-setting committee and the somewhat more hawkish-looking projections of its 17 individual members, has left some economists unsure as to when the Fed will start to reverse its historic, all-out support of the U.S. economy.

Some are re-examining the Fed's choice of language and questioning whether the term "exceptionally low" really means the current level of the Fed funds rate of zero to 0.25 percent.

Others are asking what the phrase "late 2014" means more precisely as they try to decipher the nuances of a central bank that is taking bold steps to support the economic recovery while at the same time stressing transparency into its inner workings.

"You can't possibly know with any degree of confidence what will unfold given this degree of uncertainty," said Michael Moran, chief economist at Daiwa Capital Markets, in New York, referring to the wide range of views on where rates are headed. "You just have to keep an open mind on monetary policy."

The Fed has kept short-term rates below 0.25 percent for more than three years already and purchased some $2.3 trillion in long-term securities to help the U.S. economy claw its way back from a brutal recession.   Continued...

<p>Federal Reserve Chairman Ben Bernanke delivers opening remarks at a conference on "Small Business and Entrepreneurship during an Economic Recovery" at the Federal Reserve in Washington, November 9, 2011. REUTERS/Hyungwon Kang</p>