Fed’s Job Gets a Lot More Complicated After Likely December Hike
(Bloomberg) -- For Federal Reserve Chairman Jerome Powell, the days of straightforward policy meetings are numbered.
An interest-rate increase at the Dec. 18-19 gathering of the U.S. central bank is priced at around 70 percent odds and the case for a move, backed up by comments from Powell and his colleagues this week, is supported by strong economic growth and ultra-low unemployment.
But a hike next month would also lift the top Fed’s benchmark target rate to 2.5 percent -- the bottom of officials’ range of estimates for a neutral policy setting that neither spurs nor slows growth. Going forward, officials will have to decide how much higher to go. Investors are reading their recent remarks as backing off from a policy on autopilot to a strategy that could see them pause in 2019 and wait for feedback from the economy.
Powell on Nov. 14:“We have to be thinking about how much further to raise rates and the pace at which we’ll raise rates. And I think the way we’ll be approaching that is to be looking really carefully at how the markets and the economy and business contacts are reacting to our policy.”
“A non-economic example would be you’re walking through a room full of furniture and the lights go off. What do you do? You slow down. You stop, probably, and feel your way. So it’s not different with policy.”
“There is this narrative that the Fed is going to keep hiking until something breaks,’’ said Neil Dutta, an economist at Renaissance Macro Research. “I don’t buy that. Global growth weakness has caught their attention.’’
Fed officials in September estimated a range of 2.5 percent to 3.5 percent for a neutral policy rate. The Fed’s benchmark policy rate is currently 2 percent to 2.25 percent.
Subsequent moves, as Powell’s remarks about maneuvering in the dark made clear, are highly dependent on what they bump into and what the shape of things they encounter tell them about the outlook.
Officials including Fed Vice Chairman Richard Clarida and Chicago Fed President Charles Evans are not comfortable maintaining a stimulative rate at a time when the labor market is beyond their estimate of full employment and inflation is at their 2 percent target.
The Fed’s dot-plot of quarterly interest rate forecasts, which will be updated next month, showed a fourth 2018 rate hike penciled in for December and three more moves next year.
“Being at neutral would make sense,” Clarida told CNBC on Friday. Evans, speaking later in the day, used almost identical language at an event in Chicago. “It makes a lot of sense to at least get back to neutral,” he said.
Despite their desire to keep moving, there are plenty of signs that their rate increases are starting to have an impact. Housing markets have slowed, financial market volatility has increased, and credit spreads have widened as investors reassess the outlook for growth and profits. What’s more, estimates for global growth are slowing.
“The global economy is something” the Fed has to pay attention to, Clarida said, adding that there “is some evidence that it’s slowing.”
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