It's time for the complaining analysts to shut up

All those analysts who have complained for years that the Federal Reserve can't really be trusted because it hasn't set an explicit inflation target are going to have to shut up.

All the traders who are insisting that the Federal Open Market Committee has to cut its 4.5 percent overnight lending rate target again next month to ward off a recession can keep up their clamor.

The FOMC on Tuesday released projections of the economic outlook from its 17 participants covering 2007 and the next three years. It was the first time such details were made public, and they were accompanied by extensive commentary on the risks the officials see to their projections.

The projections were released along with the minutes of the FOMC's October 30-31 meeting at which officials voted to cut the lending rate target by a quarter-percentage point.

Not surprisingly, given all the recent problems in financial markets and continued declines in housing, Fed officials lowered their expectations for economic growth in 2008.

Back in June, growth of 2.5 percent to 3 percent was anticipated. Now the range is both lower and wider from a little more than 1.5 percent to more than 2.5 percent.

Some investors and analysts immediately took that lower projection as evidence the Fed needs to cut rates more. Some analysts, for instance, said that was why the dollar dropped almost a penny and a half, to $1.48 per euro, shortly after the minutes were released.

But the minutes themselves indicated clearly - as several officials also have in public appearances - that the October 31 rate cut, and the half-point cut that preceded it in September, were intended to address faltering growth.

Moreover, the minutes said that many members regarded even the decision to reduce the target by 25 basis points as "a close call". And, of course, Thomas M. Hoenig, president of the Kansas City Fed, dissented in favor of no cut.

Hoenig "judged that policy needed to be slightly firm to hold inflation in check", the minutes said.

The market reaction to the Fed's collective message is evidence that no matter how clear officials may be in their statements and projections, some analysts and investors either aren't going to hear or aren't going to accept what they hear.

In other words, even good communications - and what the Fed did yesterday certainly qualified as that - aren't always going to accomplish what the Fed intends.

On the other hand, what they did should settle the politically sensitive inflation targeting issue in this country once and for all.

The projection details showed what inflation and unemployment rates the five members of the Fed Board - there are two vacancies - and the 12 Federal Reserve bank presidents believe would meet the central bank's dual mandate of stable prices and maximum employment.

The numbers aren't set as targets. Rather, they are the projections for 2010, a period far enough into the future for monetary policy to achieve the desired goals. There was no information about what any official regarded as appropriate policy.

For inflation, the projected rates ranged from 1.6 percent to 1.9 percent, as measured by the personal consumption expenditure price index. And for that year the figures for core inflation, which excludes food and energy items, are the same.

For the unemployment rate, the 2010 projections run from 4.6 percent to 5.1 percent. That is the range projected for the jobless rate in 2008 and 2009 as well. The rate last month was 4.7 percent.

The view of Fed officials on one other key number - how fast the economy can grow when it's close to full employment without causing inflation to accelerate - is also embodied in the long-run projections.

For instance, in 2010, when all the current economic disruptions probably will have faded away, gross domestic product growth is forecast at 2.2 percent to 2.7 percent. Only two officials put it at less than 2.4 percent.

Economists refer to this figure as potential or trend GDP growth, and officials revised down their estimate of it after last summer's benchmark revisions to the GDP accounts by the Bureau of Economic Analysis.

Taking the projections as a whole, it's plain Fed officials expect the economy to recover slowly but solidly from all the recent turmoil. There's no recession-inspired spike shown in the unemployment rate, nor a jump in inflation from rising oil prices.

Core PCE inflation is projected be no higher than 2 percent in 2008, while overall inflation isn't expected to be much higher than that, if at all.

Many on Wall Street aren't as sanguine about either growth or inflation, and many would like to see at least several more rate cuts.

Late on Tuesday Fed funds futures contracts indicated that investors put a 90 percent probability on another 25 basis point cut in the lending rate target at the December 11 FOMC meeting, and a 70 percent probability of another one on January 30.

John M. Berry is a Bloomberg News columnist. The opinions expressed are his own.

(China Daily 11/23/2007 page16)