By Howard Schneider

WASHINGTON, (Reuters) – The U.S. Federal Reserve clearly telegraphed a march interest rate increase after its meeting this Wednesday, but officials are still awaiting to see how inflation and the economic overall respond in the coming months.

Former Fed officials indicated that in such an environment it could be challenging – and even dangerous – to tie the Fed itself to the forward-looking statements made in the past. Fed policy statements use words like “gradual” to convey expectations about quarterly increases.

With so much unknown about where prices, the pandemic and the economy are heading, “I don’t see how they can say they are going to be ‘patient’ or they are going to be ‘gradual’ or they are going to move ‘deliberately’ or whatever word you like because it is too easy to imagine outcomes where it is wrong almost right away,” said William English, a professor at the Yale School of Management who ran the Fed’s Monetary Affairs Division responsible for drafting policy statements.

These projections will be used to gauge the economic outlook and provide insight into key variables.

These projections are often criticized for being confusing. They can be misinterpreted as “forecasts” or plans of the central banking, which is why they may be out of date almost immediately after publication.

They might be the most useful in a situation where the Fed wants to make a hedge on its policy statements.

Although the Fed is committed to an aggressive fight against inflation, its public statements are misleading as it also admits that they play a kind of “waiting game”. A lot of policymakers feel that progress in lowering inflation will be made by supply chain issues diminishing, and eventually an easing panademic which allows for normal commerce and work.

On this hope, they restated projections which as of December only predicted modest but not restrictive increases in interest rates.

Although it is unclear when these developments will occur, they are likely to help curb headline consumer inflation which was at 7% for December. This level has been the highest since the 1980s. Fed officials are concerned that inflation could become embedded and reshape the psychology of people, making it more difficult to eradicate. This has prompted Fed officials to take more drastic measures to reduce credit and consumption, and to suppress inflation using monetary means.

‘HIGHLY UNCERTAIN’

Because of the high stakes, officials won’t go all-in until it is necessary.

According to Vincent Reinhart (chief economist at Dreyfus and Mellon), “they’re not going to agree to any commitment because they want to ‘humble and nimble’.” He cited words that Chair Jerome Powell used to admit that the Fed was wrong about its predictions during the pandemic and might have to adjust policy quickly to respond to these events.

Reinhart said that, absent any guidance from the statement, the “dot plot” is important. Reinhart was a former Fed employee who served as the head of monetary affairs as well as being an economist for the Federal Open Market Committee.

The dots plot displays officials’ projected projections regarding the Fed’s appropriate target policy rate for coming years. This data is based on four out of eight annual meetings of the central bank. As they had to during much of the pandemic, the central bankers need to keep up with the data and the markets in the March next set.

The Fed’s abrupt shift in stance has been due to the fact that “transitory inflation” that was expected to disappear as soon as the pandemic reopening bumps were swept away proved too unstable with the price rises that continued and grew throughout the economy.

Powell indicated that there would be an inflation increase in the following set of projections. Powell stated in a press conference that the situation is “slightly worse” in December than it was in December.

This could impact officials’ rates outlook. The December median forecast predicted three rate increases of quarter-point each. This could also be useful if the shifts are higher, but it does not convey any policy commitment.

Powell said that the Fed may be blindsided in any direction by either inflation that does not fall as quickly as expected and requires a stronger response or developments that bring inflation into line and permit the Fed to do more work.

Powell acknowledged that the path to high inflation is “highly uncertain”. He cited reasons Powell believes inflation will continue to slow, while stating the Fed was still “committed” to using its tools “to make sure that high levels of inflation…do not become entrenched.”

We’ll continue to ask this question throughout the year… Are things going as expected? Powell spoke. Powell said that if the economy slows down or inflation drops more than anticipated, then we will react accordingly. Instead, if inflation is at a higher or more consistent level than expected, then we will react accordingly.