Federal Reserve chair Jerome Powell was determined to reject any notion of political interference in the decision to raise rates another quarter-point, but he was hard put to defend the hike with respect to inflation undershooting the Fed’s 2-percent target. When asked why the Fed raised rates when it is undershooting the inflation target and its own forecasts suggest it will next year, too, Powell came as close to double talk as his commitment to plain speaking allows.
His only response was that this rate hike, the ninth since the central bank started raising rates and the fifth quarterly hike in a row, was justified in view of a “healthy economy.” However, Fed policymakers did scale back their forecasts for growth slightly, down 0.1 percentage points this year and through 2021, but at 1.9 to 2.0 percent that is arguably still healthy.
Nevertheless, it might be wrong. Which begs the question of why the Fed would raise rates at just this meeting when nothing suggests it's necessary.
Powell was equally inconclusive when asked about spacing out future rate hikes, beyond reiterating that policymakers expect two rate hikes next year instead of three, as they did in September. His remarks could easily leave the impression that the Fed raised rates at this meeting simply because it could. Doing so demonstrates that it does not have to listen to President Trump or anyone else who thinks the timing of this hike might be a mistake.
QT To Continue; Two Hikes Next Year
Powell didn't offer investors much hope on the quantitative tightening front either. He of course avoids the words “quantitative tightening” and prefers to refer to it as “balance sheet runoff.” The Federal Open Market Committee (FOMC), according to him, feels this runoff is working quite well on autopilot, some $50 billion a month, and that the policy focus should remain on the federal funds rate.
Before too long, journalists shifted the questioning to bank supervision, realizing they were not going to get anything more from the chairman on monetary policy.
On balance, the Fed chair seemed a bit more at sea and uncomfortable than he has in past press conferences. The Fed may be glad that this particular meeting is over. It had baked in a rate hike and could not back off once the president started attacking them for it.
Investors might have preferred a little more uncertainty regarding two rate hikes next year. Maybe one? Maybe none? But the commitment was hedged more than that leading up to this rate hike.
The Fed consensus statement, unanimously approved by the 10 voting members, inserted the word “some” in front of “further gradual increases in the target range of federal funds,” hinting there is an end to this process.
Also, policymakers lowered their forecast for the longer-run level of the benchmark rate to 2.8 percent from 3.0 percent. It could actually claim to be near enough to that level with just one more rate hike next year. And they added a long phrase to qualify that the outlook seemed roughly balanced, saying they “will continue to monitor global economic and financial developments and assess their implications for the economic outlook.”
Had the Fed actually declined to raise rates at this meeting, however, the market reaction—all major US indices sold off after the announcement—might have been even more severe. Forgoing this rate hike would have demonstrated much less confidence in the economy, aside from the fact that it would have been a worrying concession to political pressure.
Starting next year, the Fed chairman will hold a press conference after all eight FOMC meetings. This makes each meeting “live”—that is, susceptible to a change in monetary policy—but also takes a lot of the pressure off the Fed. The central bank may or may not raise rates in March, but it can do so in May if it takes a pass, and does not have to wait until June.
A pause can last as long as necessary. The Fed can skip a rate hike in March, and in May, and even later and still get in two in 2019, if it still wants to. The CME Fed fund futures shows a better than even chance of the rate remaining at the 2.25-2.50 percent rate set this week through at least October.