Central bank watchers have spent much of the past few days taking measure of the Federal Reserve’s shifting forecasts for the economy and interest rates. At their meeting last week, Fed officials reduced their estimate of the long-run sustainable rate of U.S. unemployment. They also reduced their estimates of where their benchmark interest rate – the federal funds rate — would finish 2015, 2016 and 2017. Both developments pointed toward easier monetary policy than the Fed had been signaling before.
Here are a few explanations that might have played into the shifts:
DISAPPEARING HAWKS: Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser both retired and missed the March policy meeting. Both are policy hawks who leaned toward higher rates. Instead of submitting their own forecasts for the rate outlook, the forecasts were submitted by staff for the regional Fed banks. (The regional bank’s first vice president traditionally assumes the role of president when there is a vacancy.)
It is possible that the staff of the banks had more mainstream estimates than their departed bosses. When you look at the evolution of interest rate forecasts excluding hawks, the shift between December and March was less dramatic than it was with the hawks. The December median of Fed estimates for interest rates at year-end 2015 was 1.125%. It shifted down to 0.625% last week. Excluding two estimates from the hawkish end, the median shifted from 0.875% to 0.625%, less dramatic than with the hawks.
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