Fed likely to hint of no rate increase before 2014

[January 24, 2012]  WASHINGTON (AP) -- It could be quite a while yet before the Federal Reserve starts raising the interest rates it's kept at record lows for three years.

Maybe not before 2014.

That's the thinking of many analysts as the Fed prepares this week to provide more explicit clues about how long short-term rates will likely stay near zero.

Starting when their policy meeting ends Wednesday, Fed members plan to forecast the direction of those rates four times a year. The clearer guidance will accompany the Fed's usual quarterly predictions of growth, unemployment and inflation.

The new hints about rates are part of a Fed drive to make its communications with the public more transparent. The more immediate goal is to assure consumers and investors that they'll be able to borrow cheaply well into the future.

No announcements are expected Wednesday of any further Fed action to try to lift the economy. Most analysts think Fed members want to put off any new steps, such as more bond purchases, to see if the economy can extend the gains it's made in recent months.

That's true even though this year's new roster of voting members on the Fed's policy panel suggests that fewer voters would likely oppose further steps to boost the economy. Twice last year, Fed action to try to further lower long-term rates drew three dissenting votes out of 10.

Instead, expectations are focused on the likelihood that the Fed's first quarterly forecast of interest rates will signal no rate increase is probable until at least 2014. That would mark a shift. Since August, the Fed has said in policy statements that it planned to keep its benchmark rate at a record low until at least mid-2013, as long as the economy remained weak.

Here's why analysts expect the Fed to signal that most members see no increase before 2014:

On Wednesday, the Fed will use two charts to signify the thinking of each of its 17 policy committee members about rates.

One chart will illustrate how high each committee member thinks the Fed's benchmark rate will be at the end of 2012, 2013 and 2014.

A second chart will show how many members think the first rate increase will occur in each year from 2012 through 2016.

The charts won't identify any member by name.

Because the range of options extends as far as 2016, many analysts think the consensus view within the Fed is to avoid any rate increase before 2014 -- the average of the possible options.

"Just seeing that the choice of a year for the first hike in the Fed funds rate goes all the way out to 2016 makes us think there are at least a few members of the committee who don't want to raise rates until the unemployment rate gets back down to 5 percent or 6 percent," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi.

"We guess there will be some hawks looking for a hike in 2013 and some doves thinking more like 2015," Rupkey said. "The weighted average is likely to be 2014."

Hawks on the Fed tend to be concerned that super-low rates will stoke inflation; doves worry more about high unemployment.

Ward McCarthy, chief financial economist at Jeffries & Co. Inc., said he thinks the Fed's guidance will hint that the first rate increase could come in early 2014.

Others, such as economists at RBC Capital Markets, think the forecasts will suggest no change until late 2014.

A further clue to the Fed's plans will come in its economic projections. In its last projections in November, the Fed forecast that the economy would grow between 2.5 percent and 2.9 percent in 2012. That figure exceeds the forecasts of many private economists. Should the Fed reduce its expectations for growth, that could signal that it's prepared to do more for the economy.

The Fed has already taken numerous unorthodox steps to try to strengthen the economy. Since 2008, for example, it's kept its key rate, the federal funds rate, at a record low between zero and 0.25 percent. It's also bought government bonds and mortgage-backed securities to try to cut long-term rates and ease borrowing costs.

The idea behind the Fed's two rounds of bond buying was to drive down rates to embolden consumers and businesses to borrow and spend more. Lower yields on bonds also encourage investors to shift money into stocks, which can boost wealth and spur more spending.

Some Fed officials have resisted further bond buying for fear it would raise the risk of high inflation later. And many doubt it would help much since Treasury yields are already near historic lows. But Bernanke and other members have left the door open to further action if they think the economy needs it.

The path to such a move could be easier because three regional Fed bank presidents who dissented last year from further Fed action are no longer voting members of the committee. They're being replaced by three who are seen as more likely to back additional efforts to aid the economy.

Vincent Reinhart, a former Fed economist who is chief U.S. economist at Morgan Stanley, says he thinks the Fed will launch another round of bond buying in the spring. That's because he thinks the economy will slow in the current January-March quarter compared with the final months of 2011.

Some think the Fed is most likely to buy more mortgage-backed securities. Doing so could help further reduce record-low mortgage rates and help boost home sales. The weak housing market has held back the economy.

Brian Bethune, an economics professor at Dartmouth College, expects another round of bond purchases in the second half of the year. Bethune thinks the Fed will use those purchases to counter the economic drag that could result if government spending cuts start next January. Those cuts are to take effect unless Congress resolves an impasse on extending tax cuts first passed during the Bush administration.

In addition to providing more guidance on rates, the Fed is weighing other changes in its communications. One could be a new statement to clarify its long-term targets for inflation and unemployment.

The Fed's inflation goal is thought to be between 1.7 percent and 2 percent. Its long-run goal for unemployment is believed to be roughly between 5 percent and 6 percent.

Some private economists say the Fed would start a new bond-buying program only after it resolves an internal debate on its communications strategy -- which could happen as soon as this week.

"They want to get the communications changes out there and get them understood before they do anything else," said Alan Levenson, chief economist at investment firm T. Rowe Price.

[Associated Press; By MARTIN CRUTSINGER]

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