The Fed’s Not Ready to Retire Forward Guidance
(Bloomberg Opinion) -- The Federal Reserve just can’t kick the forward guidance habit. This may prove useful.
The Fed still anticipates additional increases in interest rates to follow this week’s quarter-point nudge in the benchmark rate. With borrowing costs approaching neutral — a point that neither juices nor curbs the economy — the central bank is giving itself some wiggle room by keeping the forward guidance on which markets have come to rely.
As neutral beckons, the Fed could easily have removed a single sentence from its statement and, in the process, accomplished two important things: finally bury the Great Recession, and signal more clearly that officials are cognizant that growth is slowing.
Hold on! Hasn’t the U.S. economy been growing for almost a decade, and isn’t it on course to become the longest expansion? Yes, but for most of that time, the central bank felt it needed to assure the public that it wouldn’t do anything dramatic to derail the recovery. Recent Fed communications talked about “further gradual increases” in rates. This week, “some” was added to precede “further.” This is a classic fudge.
Forward guidance, used to varying degrees by most of the world’s important central banks, was around in a few manifestations before the 2008 disaster. It was deployed on steroids during those dark days and the hesitant years that followed. Now, after two years of steady quarter-point steps each quarter, it might have been time for something different.
So it’s good that the Fed assesses that borrowing costs still warrant going up. It’s a vote of confidence in the U.S. economy, even as things slip abroad. The use of “some” does imply there’s not an enormous amount of work left to do.
A commitment to “monitor global economic and financial developments” signals a potential pause for breath before the next hike. It’s not the end of rate increases, and a cut isn’t on the radar.
There’s little movement in the Fed’s economic projections and the famous dot-plot that flags where officials think rates are headed. Two increases are penciled in for next year, rather than the three that had been sketched in September.
There’s little there to suggest a recession is in the offing. That sits uncomfortably with what FedEx Corp. said this week when the company cut its profit forecast amid signs of trouble abroad. Activity is faltering overseas, and trade wars aren’t great for companies in the business of getting stuff to destinations quickly. But the warning came just three months after FedEx raised its outlook. Something is up out there.
The onus will be on Chairman Jerome Powell and other top officials to tread carefully and consistently, especially given increasing chatter in markets about a downturn.
Powell will have press conferences after each policy meeting next year, a long-overdue evolution in the Fed’s communications. More evolution will surely follow.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss writes and edits articles on economics for Bloomberg Opinion. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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