The Fed prepares the forecasts reform for key interest rates.

How would you talk about your expectations on the economic trajectory, keeping in mind worst fears? That's a question to be considered by the US Federal Reserve Chairman Jerome Powell and his colleagues after December's miscommunication. US equities dropped by 3.5% in one hour after so-called point diagramme for the Fed's forecasts for the interest rates, reflecting expectations for two hikes in 2019.

As it turned out later, investors were familiar with just a part of the whole picture, which the Federal Reserve should have drawn. They faced a base prediction of two hikes but they did not know that the regulator officials' confidence in that forecast was lowered, as the meeting minutes showed later. The Federal Open Market Committee actually rejected the forecast six weeks later, signalling that further tightening will be put on hold for some time.

The central bank is intended to avoid a similar situation in the future. Although, there are no simple decisions to consequently reflect the confidence grade of forecasts. Powell directed Vice Chairman David Carida to work on possible options whereas the central banks used to test a number of instruments as an exception earlier. Here are several opportunities discussed by the Fed ex-representatives and advisors.

More frequent forecasts.
Powell will host eight press conferences instead of four from now, and he could ask FOMC to get additional forecasts ready before every meeting. The assessment publication for every six weeks would allow the regulator to react faster on fresh data, giving the markets an understanding of how the regulator officials' opinions change. However, that would not answer the question about how the regulator would behave with unexpected scenarios for events development and how exactly the Fed representatives would assess those scenarios.

Different scenarios.
William English, the economist of Yale University, who used to obtain the position of senior Fed advisor for communications, said that an approach could be useful, with which the regulator officials would explain how could they correct the monetary policy in case of hypothetical scenarios not covered by basic forecasts, and set forth such scenarios together with publishing quarterly updates.

This idea looks intriguingly because it would allow quantifying how the Fed could react on an economic slowdown of inflation spike, for instance. The idea is also related to risks. In particular, mentioning a negative scenario, for example, a sustainable equities plunge would have scared investors.

Consensus forecasts.
A giant spurt will be required for making consensus forecasts as all of the committee members and Federal Reserve Banks presidents will have to reach an agreement about how would real rates react on any particular scenario. The Federal Reserve officials currently do not have any common prediction even for the basic scenario. All of the assessments are nothing but compilations of expectations of every single voting member of the Federal Open Market Committee, which are based on an assumption about optimal monetary policy. The median forecast is just a middle point but not an opinion, with which all of the Committee members agree as for the group.

Using formulas.
Another option might be based on publishing scenarios of the monetary policy trajectory, which are lying on some model or, actually, on a number of economic formulas. However, the Fed officials will have to reach an agreement about any monetary rule in terms of any such model would reflect their own rule, which is hard to achieve, taking in account differences between opinions inside the Committee itself.
See also:
Weekly market overview May 13 - 17.
Weekly market overview May 13 - 17.
20.05.2019
Financial news