Fed Officials Play Down Need to Boost Rate Guidance in September

(Bloomberg) -- Federal Reserve officials said they are in no hurry to update guidance on how long interest rates will stay at zero, following a historic strategy shift to be more tolerant of inflation.

Some economists saw Thursday’s speech by Chair Jerome Powell that the central bank will seek inflation that averages 2% over time -- and not react when it overshoots that goal modestly -- as signaling a change in the Fed’s description of how long it will hold rates steady at its meeting next month.

“I would prefer to wait,” Dallas Fed President Robert Kaplan said Friday during a Bloomberg Television interview with Michael McKee. “I would prefer to get more clarity on the path of the virus. I think we’ve already given quite a bit of forward guidance.”

The Fed’s quarterly projections, which will be updated at the central bank’s upcoming Sept. 15-16 policy meeting, “have already said that rates are going to stay low for the rest of this year and all of next year, and I would prefer to show some restraint here,” Kaplan said. He is a policy voter this year.

Fed officials slashed rates to nearly zero in March as the coronavirus pandemic took hold, and their most recent set of projections -- issued in June -- indicated there probably wouldn’t be any rate hikes through the end of 2022. The next update will add projections for 2023 as well.

Kaplan’s comments follow Powell’s announcement Thursday that the Fed has updated its policy strategy for achieving its employment and inflation goals. Officials are now trying to keep inflation near 2% on average over time, which means they will likely seek to run inflation above target following periods of below-target inflation.

Powell’s speech left the matter of how tactically they would aim for higher inflation for future Federal Open Market Committee meetings. With the new strategy in place, Goldman Sachs Chief Economist Jan Hatzius said Thursday he now expects “changes to the forward guidance and asset purchase program to come at the September” policy meeting.

When the central bank’s policy-setting committee cut its benchmark rate to nearly zero at the onset of the pandemic in March, it said it wouldn’t begin raising rates until the economy was “on track” to achieve the Fed’s goals.

Minutes of their last policy meeting in July showed that a number of Fed officials thought “providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point.” Central bankers see that as a potential way to foster favorable borrowing conditions -- and hence a stronger economic recovery -- by anchoring longer-term interest rates at low levels.

Gotten the Message

“Everyone expects and has got the message from the Fed that interest rates will remain low for quite some time given what our outlook for the economy is,” Cleveland Fed President Loretta Mester said later on Friday in an interview with Yahoo Finance.

“Whether we’re going to change that at upcoming meetings is really going to depend on what’s going on in the economy, and I can imagine that the time for doing that might be geared to when we’ve gotten a little bit further along in terms of it looking like the recovery is on a sustainable path,” she said.

Mester is also a policy voter this year.

The economy is recovering from the sharpest recession on record as businesses and households hunkered down when the coronavirus took hold. But unemployment remains north of 10% and the U.S. central bank has repeatedly described the outlook as extremely uncertain.

James Bullard, president of the Federal Reserve Bank of St. Louis, said “I think our monetary policy is just right for this situation.”

“We’re have a low policy rate. We’re going to stay low for a long time. Markets expect us to stay low for a long time,” he told CNBC in an interview later on Friday. “I think it’s steady as she goes for the Fed.” Bullard is not an FOMC voter this year.

‘Bit More Risk’

In the new statement on longer-run goals, the Fed said its decisions would be informed by its assessment of “shortfalls of employment from its maximum level.” The previous version had referred to “deviations from its maximum level.” The change de-emphasizes previous concerns that low unemployment can cause excess inflation.

Kaplan said the Fed’s new approach toward its inflation goal could eventually help more minorities find jobs in the future, though he cautioned there were limits to how much above-target inflation it could tolerate.

”On the margin, I’m willing to take a little bit more risk in service of getting underrepresented groups into the labor force -- a little bit more risk on inflation -- but I am not for one going to be willing to take risk that we’ll lose price stability a la the ‘60s and ‘70s,” the Dallas Fed chief said. “I’m going to be on guard against that.”

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