Tuesday, January 24, 2012

Forecasting the Fed

The Federal Reserve's new policy of projecting when it will raise interest rates, which we discussed here a few weeks ago, gets its first trial tomorrow. At the close of the Fed's two-day policy meeting, they are scheduled to release a forecast for when it will raise the benchmark Fed Funds rate, which has been near zero for a couple of years now.

In somewhat of an attempt to steal the Fed's thunder, Reuters released the results of a poll of Wall Street economists on when they expect interest rates to rise. The consensus answer was that we should see an increase sometime in the first half of 2014. That's a pretty safe prediction, considering the Fed has already said it will keep interest rates right where they are until at least the middle 0f 2013.

What will be interesting will be to see if the Fed's forecast matches that of the Wall Streeters. And if they differ, whose prediction will turn out to be more accurate? We won't know that answer for a long time, but there's not much reason to think that the Fed will anticipate economic conditions any better than the top economists on the Street.

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