Today Is the First Day of the Rest of Jerome Powell’s Fed Tenure
(Bloomberg Opinion) -- Welcome, Jerome Powell 2.0.
A little less than a year into his term as Federal Reserve chairman, the central bank is ready to shift gears. Instead of the predictable quarter-point increases in interest rates every quarter, the Fed is nearing a pause. It's about as official as it gets.
It’s not an end to hikes, and it’s far from a cut. It's important these are not conflated. Powell's remarks to this effect were impossible to miss. Central bankers are often said to speak in code and nuance. Powell shows a preference to be more direct and informal; he tends to cloak his remarks less academically than his predecessors did.
That brings us to the second shift underway – for the communicator as much as what's being communicated. His riff in early October that the Fed was a “long way” from a neutral level of interest rates -- one that unnerved bond investors and caused yields to jump -- looks like a rookie mistake. On Wednesday he said rates are “just below” neutral. To be fair, neutral is tricky to define.
“Just below neutral” is even trickier.
The Fed's projections published in September and scheduled for an update next month put the long-term sustainable benchmark rate at 3 percent. That's a fair proxy for neutral. That benchmark rate, assuming an increase in December, will end the year in a range of 2.25 percent to 2.5 percent. Not far off 3 percent. Does that imply a pause after December's likely move? Or do officials eek out one or two more in the first half of 2019? I suspect the panoply of comments, estimates and, yes, the famous dots released after the December conclave will be a good start toward answering that.
Powell’s “long way” phrase seems to have been taken out to the backyard and euthanized. That is fine; it didn't jibe with what the Fed's own projections indicated. Also absent from recent dialogue is any suggestion from policy makers that the Fed go beyond neutral with rate hikes to restrict the economy. That flirtation appears to have ended.
Here's hoping it isn't also the end of Powell's efforts at contemporaneous communication. The work of central banks is vitally important, and to the extent that the temple doors can be thrown open, they should be.
Top Fed officials are entitled to flubs early in their tenure. They have almost all done it. In remarks to the same venue Powell spoke at this week, the Economic Club of New York, Janet Yellen was construed in 2014 as being more of an inflation hawk than she was in practice. Yellen recovered and got the Fed into the path of normalizing monetary policy after the emergency measures of 2008 and the Great Recession's aftermath.
Powell inherited that. Telegraphing the phase that came after that was always going to be challenge. He got it right this time. The message was clear and hardly anyone seems to be freaking out.
R.I.P., “long way.”
To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net
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.
©2018 Bloomberg L.P.