If, as market-watchers expect, the Federal Reserve raises interest rates in June, then expect to hear advance word of this at a critical meeting of the central bank's Federal Open Market Committee in March.
Sandra Pianalto, a former president and CEO of the Federal Reserve Bank of Cleveland, made this prediction at Tuesday's opening general session of the IMCA 2015 New York Consultants Conference, held at the Sheraton New York hotel in midtown Manhattan.
"At its December meeting, the Federal Open Market Committee said it would not likely normalize [interest rates] for at least the next couple of meetings and that it will be giving information about pending policy actions two meetings out, said Pianalto. "So if they're going to make a move in June, the March meeting will be critical in their communications with the public."
But a rate hike in June, she cautioned, is not a sure bet. Key reason: The Fed is operating in "unchartered waters."
The Fed's benchmark used to determining monetary policy, the federal funds rate, has been near zero since 2008, an experience the FOMC has not faced before. Also, inflation remains low, so there is little pressure to raise interest rates.
A third factor is the Fed's large balance sheet — $4.5 trillion-plus — an unprecedented sum owing to the Fed's adoption since the 2007-2009 financial crisis of "unconventional tools" to help guide the economy. Pianalto said the Fed has tested some of the tools, but not in the quantities needed to control the Federal Funds rate.
Communicating its intentions effectively to the public while not upsetting markets, she added, will also be a hurdle.
A most important committee
Facing all of these challenges head-on is the Federal Open Market Committee, which determines monetary by influencing the availability and cost of money and credit. The FOMC has 19 members: 7 board of governors and 12 Federal Reserve Bank presidents.
Just over half of the committee consists of voting members. Among them: the 7 board of governors, 4 Federal Reserve bank presidents, plus the president of the Federal Reserve Bank of New York
The FOMC's policymaking, said Pianalto, holds 8 scheduled meetings annually, during which the committee reviews economic and financial conditions, forecasts the economic outlook, and then votes on an appropriate monetary policy.
Whatever the FOMC's decision on rates, Pianalto said, it must adhere to its "dual mandate:" statutory goals established by Congress for achieving maximum employment and stable prices. The FOMC pegs the optimal inflation rate for these twin objectives at 2 percent.
While noting the maximum employment benchmark is determined by nonmonetary factors —technology, population, labor force demographics, regulation, fiscal policy and others — the Fed believes the cap to be "consistent with an unemployment rate" of between 5.2 and 5.5 percent.
The economy is fast-approaching this target range. The Fed's current projections have the unemployment rate dropping from 5.8 percent in 2014 to 5.2 or 5.3 percent before year-end 2015. By 2017, the rate could dip to as a low as 4.9 percent.
