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Federal Reserve officials are considering an overhaul of their economic forecasting, aiming to make clear their objectives for growth and inflation in the aftermath of the longest recession since the 1930s.

Members of the Fed’s Open Market Committee, who start a two-day meeting in Washington today, may need to extend their predictions beyond the current three-year period, officials and Fed-watchers said. Because of the length and depth of the downturn, long-run trends may not be restored in three years.

A longer horizon for the projections may help the public and investors understand where the central bank aims to steer the economy. Pressure for a new anchor for policy is building after the Fed cut its benchmark interest rate to as low as zero percent last month, removing the traditional target.

“Interest rates are no longer what monetary policy is about,” said Frederic Mishkin, who left his post as Fed governor in August. “A much more important part of policy now is managing expectations, and, in an environment like the one we are in now, having more clarity on inflation objectives becomes critical.”

One way to do that is to lengthen central bankers’ forecast horizons, said Mishkin, who has collaborated with Fed Chairman Ben S. Bernanke on research and is a professor at Columbia Business School in New York.

New Projections

Fed officials discussed “refinements” to their economic projections at the FOMC’s December meeting, minutes of the gathering showed earlier this month. They will come to this week’s two-day meeting with new quarterly estimates for growth, employment and prices for 2009-2011.

Bernanke and Mishkin pioneered the introduction of quarterly, three-year forecasts in October 2007. Previously, the estimates of Fed governors and district-bank presidents were released only twice a year, with projections for the coming two years.

While Bernanke favored an explicit target for inflation in the past — something included in the mandates for other major central banks — he has noted the political difficulty of instituting one for the Fed. Instead, he highlighted officials’ third year of predictions as a signal for policy objectives.

The trouble now is that the economy may still be recovering in 2011, and the latest forecasts may not reflect policy makers’ ultimate goals. Introducing a five- or 10-year average could address the issue.

Inflation Target

“They are in uncharted waters,” said Stephen Stanley, chief economist at RBS Greenwich Capital Markets Inc., who previously worked as an economist at the Richmond Fed. “It is ironic that getting to a point when you start to worry about deflation provides more clarity as to why an inflation target is a good thing.”

Fed officials considered that “added clarity” about their goal for inflation “might help forestall” any public expectations for the rate to drop below desired levels, minutes of their Dec low fee payday loans. 16 meeting showed. Deflation, or sustained declines in consumer prices, could further damage the economy by making debts more expensive to pay off and banks less willing to lend.

The Fed’s preferred benchmark, the personal consumption expenditures price index, excluding food and energy, may rise just 0.78 percent this year, according to Macroeconomic Advisers LLC in St. Louis. That is about 1 point below the preference range that policy makers signaled in their third-year forecasts in January 2008.

Plosser, Lacker

Using an extended forecast to underscore an inflation goal might appease some officials who have expressed concern about future threats to price stability, including regional presidents Charles Plosser of Philadelphia and Jeffrey Lacker of Richmond.

Setting a balance-sheet or money-growth target would put them at odds with members of the Fed Board of Governors in Washington, who also sit on the FOMC. The governors want leeway to keep on expanding the Fed’s assets to absorb risk as financial markets remain unsettled.

The Standard & Poor’s 500 Financials Index tumbled 2.1 percent yesterday to 118.41, bringing to 30 percent its slide since the start of the year. Citigroup Inc. is down 50 percent this month, Bank of America Corp. has lost 57 percent and Wells Fargo & Co. has dropped 47 percent.

FOMC officials will this week debate how much the balance sheet should grow, what assets the Fed should buy and how to signal their plans. Purchases of Treasuries would be the least controversial course, because the Fed already trades federal debt. Still, Lacker warned this month that the government shouldn’t be too dependent on the Fed to finance its programs.

Lacker’s Concern

“Mixing monetary policy with fiscal policy is fraught with risks,” because central banks have historically met resistance when they decide to back off from assisting the government, Lacker, a voting member of the policy committee this year, said Jan. 16.

Some bond investors would like to see Fed officials begin talking about goals that might also shape an exit strategy later on.

Fed officials are “going to continue to buy assets, and they are going to try” to hold down longer-term Treasury yields, said Richard Schlanger, who helps manage $15 billion in fixed-income securities at Pioneer Investments in Boston. “Our great concern further down the road is the exit strategy.”

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