Policy: Economy

Businesses not confused by Federal Reserve’s interest rate plans

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PennAve,Joseph Lawler,Economy,Federal Reserve,Ben Bernanke,Budgets and Deficits

Despite the confusion surrounding the timing of the Federal Reserve’s plans for tapering its quantitative easing program, Main Street businesses have an accurate sense of how the Fed’s policies will affect them.

That is the finding of a survey of businesses in six Southern states conducted by the Federal Reserve Bank of Atlanta. The poll showed that companies’ expectations about interest rates closely match the Fed’s plans.

The Fed has said in recent statements that it will keep short-term interest rates near zero as long as the unemployment rate is above 6.5 percent and inflation is low. Members of the Fed don’t expect unemployment to dip to that level until late in 2014 or early 2015, according to projections they released in June, meaning that for now the hike in interest rates is slated for 2015.

Those projections appear to have filtered down to corporate executives and small business owners who the Atlanta Fed surveyed in August. The following chart shows Fed officials’ projections of where interest rates will be at the end of 2015 (in blue) against Main Street businesses’ (in green):

Businesses are more likely to think that rates will be above 1 percent, but otherwise their expectations closely parallel the Fed’s, with the majority expecting the Federal Funds Rate — the interest rate on funds loaned overnight between banks — to be between 0.5 and 1.5 percent.

The Fed’s short-term target rate has been 0-0.25 percent since December 2008, the height of the financial crisis. It was as high as 4.25 percent at the start of the official recession in December 2007.

Fed Chairman Ben Bernanke has said that the Fed will continue to use forward guidance about short-term interest rates to provide stimulus for the economy even as the central bank begins this fall to wind down the other major tool it is currently using, the $85 billion in monthly bond purchases. Bernanke said in a July congressional hearing that “we need to provide continued accommodation even if we begin to change over time the mix of tools that we use in providing that accommodation.”

This latest survey is an indication that interest rate communications may be the tool that causes the least uncertainty about Fed policy, especially in comparison to the frequently misunderstood quantitative easing program.

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