Robin Harding A quick thought ahead of the FOMC

The new FOMC interest rate forecasts will be released today with the Fed’s Summary of Economic Projections at 2pm. A lot of the commentary suggests that the forecasts of the first rate rise will be heavily clustered in 2014. These are illustrative examples from Credit Suisse:

That the large majority of forecasts will be for 2014 seems very likely, but it’s important to remember that these are not forecasts of what FOMC participants think will happen; they are forecasts of what participants think should happen. They are “participants’ projections of the appropriate target federal funds rate”.

We know that there are probably five participants who think that the current stance of monetary policy is too easy, including three who voted against Operation Twist last September. Taken to a logical extreme, that would imply they think interest rates should rise today. We also know there are participants at the other end who think that the current stance of policy is too tight.

I therefore think there is a risk that the dispersion of the forecasts for the timing of the first rate rise may be larger than the market expects and this could be a bit of a shock at 2pm.