By Scott Lanman and Craig Torres
Nov. 14 (Bloomberg) -- Federal Reserve officials will double the number of economic forecasts each year and extend their scope, offering what Chairman Ben S. Bernanke called a ``rough'' guide to the direction of interest rates.
Central bankers will also add predictions for a price gauge that includes food and energy costs and give a ``fuller discussion'' of members' projections, the Federal Open Market Committee said in a statement in Washington. In a related speech, Bernanke said the overhaul will give the public a better idea of the Fed's thinking on growth, prices and employment.
The overhaul is the product of Bernanke's 1 1/2-year effort to bring more transparency to the Fed's policymaking and falls short of his one-time goal of setting an inflation target. The first new predictions come Nov. 20, offering investors, who currently expect a rate cut next month, a glimpse of the Fed's most recent reading on the economy three weeks before it meets.
``The market is going to have to be on a steep learning curve on this one,'' said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. ``This is a good move over time, as it will give markets more access to the decision-making process,'' though it may cause ``chaos'' next week because investors will need to digest a ``breadth of views'' among officials, she said.
Fed Minutes
Fed governors and district-bank presidents will release their quarterly forecasts in minutes of FOMC meetings in January, April, June and October. Outlooks will also continue to be a part of the central bank's semiannual reports to Congress in February and July. The publications will include commentary on officials' thoughts about the risks to their projections, Bernanke said.
Bernanke, 53, approaching the midpoint of his four-year term as chairman, completed the review after turmoil in credit and housing markets forced the Fed to lower borrowing costs twice. Meantime, writedowns by large banks, a surge in oil prices and the weakening dollar are bringing more investor attention to the short-term economic risks rather than long-term forecasts.
``Today's announcement at least is unlikely to cause anyone to change their forecast'' for interest rates, said James O'Sullivan, senior economist at UBS Securities LLC in Stamford, Connecticut. ``More and more detailed forecasts do not necessarily result in more accuracy,'' he added.
Bernanke said last week that risks between inflation and growth are ``roughly'' balanced, though traders continue to anticipate the Fed will cut rates again next month.
`Timely Insight'
``The changes will provide a more timely insight into the committee's outlook, will help households and businesses better understand and anticipate how our policy decisions respond to incoming information and will enhance our accountability for the decisions we make,'' Bernanke said today at the Cato Institute, a research group in Washington.
Other changes include publishing comparisons with the previous set of forecasts and charts that show the ``distribution of participants' projections and how that distribution has changed,'' Bernanke said. The Fed will continue to provide the full range and ``central tendency'' of the forecasts, which excludes the three highest and lowest figures.
Bernanke acknowledged that having a formal inflation goal may conflict with the Fed's so-called ``dual mandate'' from Congress to achieve maximum employment and price stability ``on an equal footing.''
Moving to a full-fledged numerical price goal may have proved unpalatable to Democratic lawmakers who oversee the Fed. House Financial Services Committee Chairman Barney Frank of Massachusetts and other legislators have opposed such targets, arguing that would diminish the dual mandate.
Long-Run Views
Still, by forecasting inflation three years out, Fed officials ``will convey more information regarding their views about the measured rate of inflation that, in the long run, is consistent with the committee's dual objective,'' said Bernanke, who took office in February 2006.
``The devil is in the details,'' said Robert Eisenbeis, former research director at the Atlanta Fed. ``Extending the time horizon will be important but should be interpreted with caution since the errors are huge.''
Giving the distribution of forecasts ``will provide valuable insights over time as to the range of views and the extent to which there is agreement,'' Eisenbeis added.
Fed officials will scrap projections of nominal gross domestic product, which is unadjusted for inflation. The nominal GDP forecasts ``now seem relatively less useful to the public'' given the addition of headline-inflation forecasts, according to a footnote to Bernanke's speech.
International Practice
The more-frequent outlooks will bring the Fed in line with the European Central Bank and counterparts in the U.K., Sweden and New Zealand, which all publish quarterly projections. The Bank of Japan puts out a twice-yearly report.
The Fed still trails other central banks in openness when accounting for interest-rate projections and media access. Bernanke doesn't give on-the-record interviews or press conferences, though he did answer questions today from reporters who were in the audience for the speech.
The differences were stark in early August, when ECB President Jean-Claude Trichet hit the airwaves and held a press conference while colleagues spoke to newspapers amid a global stock sell-off. Bernanke may have panicked investors if he spoke out, Fed watchers said at the time.
Today, Bernanke said the committee's projections would function in three ways: ``as a forecast, as a provisional plan, and as an evaluation of certain long-run features of the economy.''
`Plan for Policy'
``The projections also function as a plan for policy -- albeit as a rough and highly provisional one,'' Bernanke said. ``FOMC participants will continue to base their projections on the assumption of `appropriate' monetary policy.''
Futures contracts on the Chicago Board of Trade suggest investors see a 70 percent chance the FOMC will cut the overnight interbank lending rate to 4.25 percent at the Dec. 11 meeting. A fourth reduction at the Jan. 29-30 meeting, to 4 percent, carries a 42 percent probability, futures show.
Fed officials have increased the transparency of monetary- policy deliberations since first announcing rate changes in 1994 under former Chairman Alan Greenspan. The Fed last altered its forecasting in 2005, when it began issuing a two-year forecast with its February report to Congress, as well as the one in July. Bernanke advocated the change in a March 2003 speech as governor.
``Good communications are a pre-requisite if central banks are to maintain the democratic legitimacy and independence that are essential to sound monetary policy making,'' Bernanke said today.
Historical Accuracy
The Fed will also release a Board of Governors research paper on Nov. 20 on the ``historical forecasting record'' of the Fed and other institutions, a Bernanke speech footnote said.
For the first time, the Fed will give forecasts for inflation both including and excluding food and energy costs, using the Commerce Department's personal consumption expenditures price index. Fed officials say so-called ``core'' inflation is easier to predict given greater volatility of food and fuel prices and had shifted in 2004 to core forecasts only.
The predictions also include the unemployment rate.
Fed officials in July predicted their preferred inflation gauge would rise 1.75 percent to 2 percent next year.
Bernanke and several other Fed officials have said their ``comfort zone'' for that inflation gauge is 1 percent to 2 percent. The index rose 1.8 percent in September from a year before, the fourth straight month below 2 percent.
In Bernanke's congressional testimony last week, he said that the FOMC ``projected overall and core inflation to be in a range consistent with price stability next year.''
Vice Chairman Donald Kohn led the FOMC subcommittee that Bernanke charged with framing discussion on communications issues. The other members were Minneapolis Fed President Gary Stern and San Francisco Fed President Janet Yellen.
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