FT Alphaville " The comms problem Here's one visual way to see the disconnect between the hawkish shift in the FOMC's new federal funds rate projections and the steadfast dovishness of the statement itself, which preserved the late-2014 language. From Credit Suisse: This month's figures show that the two policymakers previously calling for 2016 hikes have now moved their estimation sooner. The number of policymakers not expecting the initial hike until 2014 increased by two. But since particular individuals are not mapped to their votes, the 2016 duo did not necessarily shift two years: we think it more likely that they shifted to 2015 and another pair from 2015 to 2014. The moves suggest that the average hike date has shifted from June 2014 to March 2014, as shown below. We overlay the FOMC's timing charts with our modeled gamma distribution for the initial rate hike, where we used front-end rates markets to derive the market-implied probability distribution for the timing of tightening. Below we show the probability density function implied from current market pricing, which suggests a modal market expectation of early 2014 and a median in early 2015. We think the "March 2014" average hike date is misleading, though, because it weights all votes equally. The core of the committee's leadership (Bernanke, Dudley, Yellen) is on the dovish side of the spectrum and likely expects later hikes than the majority. As such, we re-build the chart with our estimations of the relative "policy influence" of each voter. Our influence-weighted example suggests that the expected hike date has shifted from January 2015 to October 2014, very much in line with officially stated "late 2014" policy. It's not necessary to get caught up in the precise estimates to understand the broader point - and to see why the difference between the statement and the projections caused confusion. When addressing the issue during the presser, Bernanke made it clear that what matters for policy is the statement, not the breakdown of projections. And given that he clearly has enough allies or near-allies among the voting membership to bring along even those who are (or become) increasingly more hawkish than he is, the markets needn't worry that policy will begin to tighten until either he says it will or until he changes his mind. But we would make two quick points. One, as explained by Greg Ip, is that Bernanke will only be the Fed chair until January 2014, and there's no telling how his replacement will act. We might be in a different world by then, but obviously this will limit confidence in what policy will be beyond that point. Second, Bernanke's position on allowing temporarily higher inflation, which we discussed earlier, could well have been political cover, or perhaps he simply communicated something he didn't mean to. Regardless, as Ip also explains, it might be better to look at what he does rather than what he does on this matter: Both today and at his January press conference he made it clear he would tolerate inflation above 2% if unemployment wasn't falling quickly enough, the exact opposite of the message that emerged from his defence against Mr Krugman. That's not bluster; it's precisely what he's doing: both headline and core inflation are at or above 2% but the only policy option on the table is easing, not tightening. The new communications approach that was introduced earlier this year remains a work in progress, and perhaps there will be changes made later that will make future statements and projections easier to reconcile. Our colleague Robin Harding has a characteristically sharp post running through some of the options the Fed should consider, including the pros and cons of each. But the dissonance between the statement and the projections, plus the mere fact that it's hard to know how to interpret what Bernanke himself is saying, at the very least shows that there is some way to go before the additional transparency leads to more clarity. Related links: How to improve the Fed's rate forecasts - FT Money Supply Bernanke and the wrong credibility issue - FT Alphaville This entry was posted by Cardiff Garcia on Friday, April 27th, 2012 at 1:12 and is filed under Capital markets. Tagged with ben bernanke, FOMC.