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The Week Ahead: The Fed and its crystal ball

By Tom Hudson, McClatchy Newspapers –

A Super Bowl-bound coach would not be so bold as to predict the final score. Yet on Wednesday, the head coaches of the economy will begin predicting the future cost of cash for banks.

This will be the first time the Federal Reserve has published forecasts for its own target interest rate. Such predictions might not seem historic. After all, doesn’t every economist and financial commentator on TV already pretend to know what the central bank will do? And hasn’t the Federal Reserve itself pledged to keep interest rates near zero until the middle of next year?

Still, Wednesday will be the first time the Fed has publicly predicted a specific interest rate. The strategy is part of an effort led by Chairman Ben Bernanke to bring more transparency to how and what the bank does. It was only last April when Bernanke began holding occasional news conferences to try to explain his group’s perception of America’s economy.

Few will complain about more information coming out of the Federal Reserve. But the Fed, despite its granite buildings and omniscient reputation, is fallible. It was Bernanke himself, who said in the spring of 2006, “So far we are seeing, at worst, an orderly decline in the housing market.”

One year later in May 2007, Bernanke said, “We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.” He also predicted no “significant spillovers from the subprime market to the financial system.”

Public predictions by such powerful groups like the one coming Wednesday can be useful. But the challenges of predicting the economic future have been demonstrated before.

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