US Federal Reserve officials are warming to the idea of publishing their assumptions about the path of interest rates, a decision that could help ease financial conditions.
For months the Fed had pledged to keep the overnight federal funds rate near zero for an extended period. It hardened that vow in September, saying it would stay ultra-low through at least the middle of 2013.
By offering an assurance that they would be in no hurry to tighten monetary policy at the first signs of the recovery taking off, the central bank was hoping to keep investors from bidding market interest rates up.
But officials are uncomfortable with a pledge that is tied to the calendar and not economic conditions. Adding interest rate projections to their usual quarterly economic forecasts would be a straightforward way of addressing those concerns.
While some Fed officials appear to lean toward the somewhat more conventional step of purchasing bonds if a decision is taken to ease monetary policy further, communications is also on the table.
"The scope remains to provide additional accommodation through enhanced guidance on the path of the federal funds rate or through additional purchases of long-term financial assets," Fed Vice Chair Janet Yellen said on Tuesday.
Economists at 16 of 19 financial firms that trade directly with the Fed said earlier last month they believe the central bank will take more measures to strengthen the US recovery, with 12 expecting a change in communications.
"Given the high degree of liquidity in the government market and the current low levels of long rates, it is not clear how effective additional [bond] purchases would be in pushing rates down further," New York University professor Mark Gertler said.
"Hence the focus on communication as a means to improve the effectiveness on managing the private sector beliefs about the future course of policy," he added.
On Tuesday, Atlanta Federal Reserve Bank President Dennis Lockhart said that providing the monetary policy assumptions underlying officials' forecasts for GDP, unemployment and inflation would be a useful communications step. While Yellen equated a potential shift in the Fed's communications strategy with an easing of monetary policy, some more hawkish Fed officials might simply see it as a way to improve policy transparency.
Key decision likely on December 13 meeting
A decision on whether to begin issuing forecasts on the path of the overnight federal funds rate could be taken as soon as the Fed's next meeting on December 13.
That would allow officials to bring projections to the table in time for the central bank's regulatory scheduled quarterly economic forecasts in late January. At the Fed's last meeting, Chairman Ben Bernanke directed a communications committee that Yellen heads to explore the idea of rate forecasting.