MNI EXCLUSIVE: Fed to Shun June Forward Guidance: Ex-Officials

--Focus Remains On Emergency Facilities

By Evan Ryser

     WASHINGTON (MNI) - The Fed will avoid stronger forward rate guidance at its

June meeting because the benefits are fleeting and new language distracts from

asset purchases as the main tool bridging the economy through Covid-19, former

officials told MNI. 

     Investors like "explanations without equivocation," said Stern, but the

"Fed is not going to do that," former Minneapolis Fed President Gary Stern said.

"First reason is that the Fed doesn't know frequently, and secondly, why?"

     There is little incentive for the Fed to offer guidance even in normal

times, and in today's unprecedented downturn Stern suggested offering specific

timelines is risky, asking: "Who is going to be fooling who here?"

     Former officials told MNI that even if guidance is a good idea, it's too

soon for the Fed to commit. Some states are still keeping big parts of their

economies closed, health officials are warning about a second wave of infections

and unemployment is still surging.

     Richard Fisher, Dallas Fed President from 2005 to 2015, doesn't see a

sufficiently clear outlook to change communication of interest rate policy. "As

a central banker you want to do what's required but you want to do as little as

required to be effective," he said. 

     --BLURRY ROADMAP

     Mapping out where rates should go is more difficult today because the Fed's

preferred econometric model of the American economy isn't equipped for this kind

of a sudden shift, Fisher said. 

     The Fed has suspended regular forecasts and indicated it's turning to

alternative data. Vice Chair Richard Clarida on Thursday said he is relying more

on high-frequency data and indicated the central bank will again release

macroeconomic projections in June. Two Fed regional leaders earlier told MNI

they don't see much value in issuing forecasts at this meeting.

     Fed officials are keeping rates at near-zero "until it is confident that

the economy has weathered recent events and is on track to achieve its maximum

employment and price stability goals." The focus is on asset purchases that have

driven the central bank's balance sheet to a record USD7 trillion.  

     The Fed "might be ready" to give stronger guidance at the next meeting, but

that would also come with new purchases of longer-term assets, said William

English, former director of the division of monetary affairs at the Fed.

     The Fed is likely to give "some sort of conditional guidance like the

guidance they used after Dec. 2012," English said. That timeframe refers to the

so-called Evans Rule that conditions rate lift-off against inflation or

unemployment targets. 

     --EVANS RULE

     Chicago President Charles Evans told reporters earlier this month the Fed

doesn't need to offer guidance when the market sees no hike coming.

     Minutes from the April Fed meeting indicated the Committee could at

"upcoming meetings" clarify intentions with respect to future policy. "Some

participants" commented that the Fed could make forward guidance more explicit.

     Reviving an Evans Rule is risky according to Peter Hooper, who spent 26

years as a Fed economist. The Fed got in "a little bit of trouble" last time

pegging off the unemployment rate, because little inflation developed and policy

makers "had to adjust the rules," he said.

     The Fed is more likely to keep current guidance "well into the second half

of the year," Hooper said. Getting emergency Section 13(3) liquidity and credit

facilities going remains "the near-term focus."

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

[TOPICS: MMUFE$,M$U$$$,MT$$$$,MX$$$$]