FEDERAL Reserve officials are considering whether to signal a new wait-and-see approach after a likely interest-rate increase at their meeting in December, which could slow down the pace of rate increases next year.
Officials still think the broad direction of short-term interest rates will be higher in 2019, according to recent interviews and public statements. But as they push up their benchmark, they are becoming less sure how fast they will need to act or how far they will need to go, and they want to assess how the economy is holding up under moves they have already made.
How they manage this new, less-predictable approach will depend in large part on the performance of the economy and markets in the weeks ahead.
On Thursday, the Dow Jones Industrial Average tumbled as much as 785 points before paring those losses. The rebound accelerated late in the session after The Wall Street Journal reported on the Fed’s evolving thinking on rates. The blue-chip index ended down 79.40 points, or 0.32%, to 24947.67, and the S&P 500 lost 4.11 points, or 0.15%, to 2695.95.
Under the evolving “data dependent” strategy, the Fed could step back from the predictable path of quarterly hikes it has been on for most of the past two years, raising the possibility it might delay rate increases at some upcoming meetings, according to recent interviews and statements.
Under the old pattern, the Fed would raise rates again in March, but officials now don’t know when their next rate move will be after December.
Recent market turbulence for now hasn’t much dented the Fed’s view that the US economy is on solid footing, with growth strong and unemployment low. But inflation has softened in recent months, and falling oil prices portend further declines, reducing the Fed’s sense of urgency about raising rates to prevent the economy from overheating.
“We need to be attuned to... the possibility that the US economy could look very different in the first quarter, first half of 2019 than it does now,” said Dallas Fed President Robert Kaplan in an interview Thursday.
Restrained price pressures give the Federal Open Market Committee “and me, as a central banker, some latitude to be patient,” Kaplan said. He added, “There are times when the smartest thing you can do is turn over a few cards and do nothing.”
If growth or inflation heats up unexpectedly, the Fed could decide to go further than planned.
Federal Reserve chairman Jerome Powell compared the Fed’s policy strategy to walking into a living room when the lights suddenly go out. “What do you do? You slow down and you maybe go a little bit less quickly, and you feel your way more,” he said in a speech last week. “So under uncertainty of this kind, you be careful.”
The next important data release comes Friday, when the Labor Department releases November employment data.
Officials are intensely reviewing how to communicate any shift from the predictable path of quarterly increases for past two years. As part of its shifting plans, officials are weighing how to modify language in a central bank policy statement that since December 2015 has described plans for “gradual increases” in the fed-funds rate. In January, officials qualified the phrase by adding the word “further” to signal greater conviction in their plans.
Beginning at their Nov 7-8 meeting, officials discussed ways to walk this language out of the statement over the course of several meetings, given their increased uncertainty about how much further to go and at what pace.
“We shouldn’t be offering guidance if there’s this much uncertainty about the future path of interest rates,” said Minneapolis Fed President Neel Kashkari in an interview. If that guidance “ends up being wrong, it hurts or undermines our credibility.”
Since December 2016, officials have deviated from quarterly increases just once, in September 2017, to phase in a reduction in their US$4.5 trillion bond portfolio. A rate increase at the Dec 18-19 meeting would be the Fed’s ninth such move in the last three years, bringing the federal-funds rate to a range between 2.25% and 2.5%.
President Trump has criticised the Fed repeatedly for raising rates this year. Fed officials have said they will respond to economic data and not the White House when they set policy.
In September, nine of 16 officials projected the Fed would raise rates three or more times next year, while seven projected two or fewer rate rises.
In a speech Thursday, Atlanta Fed President Raphael Bostic said the Fed was “within shouting distance” of a rate the central bank considers to be neutral, meaning it is neither so low that it fuels added economic growth nor so high that it slows growth down.