Fed weighs ‘wait and see’ policy
Federal Reserve officials are considering whether to signal a new wait-and-see approach after a likely interest-rate increase at their meeting this month, 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. Under the evolving “data dependent” strategy, the Fed could step back from the predictable path of quarterly increases it has been on for most of the past two years, raising the possibility it might delay rate rises 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 yesterday.
Restrained price pressures give the Federal Open Market Committee “and me, as a central banker, some latitude to be patient,” Mr Kaplan said.
“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.”