Fed weighs ‘wait and see’ pol­icy

The Weekend Australian - - THE WALL STREET JOURNAL - NICK TIMIRAOS

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.”

Pow­ell

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