Federal Reserve Chairman Ben Bernanke’s new policy of openness has much to recommend it, in that it gives the markets information about current and future monetary policy that removes some of the guesswork of years past. But now that traders and investors have better insights into the thinking of Fed policy makers, they don’t seem to be acting on that knowledge. Seeing is not believing, apparently.
How else to explain the market reaction to the Fed’s revelation this month that a majority of its Federal Open Market Committee (FOMC) and alternates are diffident about Mr. Bernanke’s promise to continue his near-zero interest-rate policy through 2014. What one would expect to be a shocker, given the crucial importance of super-low rates for borrowing and lending throughout the economy, seems to have produced a big yawn.
The perverse sentiment among the Fed governors and regional presidents who decide monetary policy was made public in connection with the minutes of the committee’s April meeting, released in mid-May under the new openness policy. A set of charts aggregated the expectations of the 12 committee members and five alternates of future economic circumstances, and their views on what interest-rate targets the Fed should adopt over the next three years.
All but three of the 17 surveyed lined up in Mr. Bernanke’s near-zero camp through this year, but five favored higher rates in 2013. By the end of 2014 all but four have left the Bernanke fold. Thirteen want at least a quarter-point increase and seven believe 2% or above would be appropriate by the end of 2014. Beyond 2014, all but two favor 4% or above.
In the old days of Fed secrecy, a chart like this would have been pure gold to traders and investors. Imagine, an inside look at what’s cooking in the Fed’s kitchen!
But there is little evidence that securities markets are taking this news seriously. If they were, 10-year Treasury bonds would not be yielding a measly 1.7%. That’s a negative return if you use the 2.3% annual growth of the Consumer Price Index as a measure of inflation. Indeed, the Treasury was able on May 24 to auction seven-year notes at a yield of only 1.2%, a record low…