Fed to discuss when to pause gradual hikes
ATLANTA: Federal Reserve chairman Jerome Powell has signalled the US central bank could take a break from increasing interest rates at some point. His colleagues are now debating how quickly to consider such a pause.
The Federal Open Market Committee (FOMC) is almost certain to keep rates steady at the close of its two-day meeting Wednesday in Washington, and will reinforce bets on a move in September if it repeats a reference to further gradual rate hikes in the accompanying policy statement.
Pricing in federal funds futures contracts show almost zero expectation for a move at this meeting versus a probability a little above 80% in September.
Powell told Congress on July 17 that gradual rate moves were the plan “for now”, which is the kind of qualifier the committee could add to its statement to hint at a future breather in the tightening campaign.
“Given that there’s no visible inflation threat – not in the data and not in the FOMC forecasts – it makes sense to inject conditionality on future moves,” said Roberto Perli, a former Fed economist who is a partner at Washington-based consultancy Cornerstone Macro LLC. “So the ‘for now’ language seems appropriate and seems likely to make it into the statement, if not this time, soon.”
The Fed is trying to keep the US economic expansion on track after growth was buoyed by strong consumer spending in the second quarter following tax cuts, and as it closes in on the central bank’s twin goals: Stable prices, which it defines as 2% inflation, and maximum employment.
Policy makers are close on infla- tion after undershooting their target for years, and are arguably already past the level of long-term sustainable full employment, with the jobless rate at 4% in June. They’ve raised rates twice this year and have two more moves penciled in for 2018, according to forecasts that officials updated in June.
The FOMC is also considering changing its description of monetary policy from “accommodative” to something closer to neutral, the committee indicated in minutes of its June meeting. But with Powell not scheduled to brief the media on Wednesday, the easiest course would be to keep the statement’s guidance nearly identical to its June meeting.
“I don’t expect any major change in the message because Powell will not be holding a press conference to clarify it,” said Ward McCarthy, Jefferies LLC chief financial economist. “They do seem to be trying to update where they are on the policy normalisation path, and that’s going to be a communications challenge.”
Powell’s next scheduled press conference will be after the FOMC meeting on Sept 26.