Fed Officials signal readiness to pause interest rate increases

WASHINGTON: Two influential Federal Reserve officials said on Wednesday that the central bank should pause to assess economic conditions before considering additional interest rate increases, reinforcing the message delivered last week by Fed Chairman Jerome H. Powell.

The Fed on Wednesday also published an account of its most recent meeting, in December, which showed that most Fed officials already had reached a similar conclusion at that time.

Taken together, the speeches and the meeting minutes signal that the Fed will not raise its benchmark interest rate at its January meeting and that it is unlikely to do so at the following meeting, in mid-March.

But most Fed officials still expect that economic growth will be strong enough to justify rate increases later in the year.

Eric Rosengren, president of the Federal Reserve Bank of Boston, told a Boston audience that the Fed was puzzling through the recent divergence between strong economic data and faltering financial markets. “At this juncture, with two very different scenarios — economic slowdown implied by financial markets; or growth somewhat above potential GDP growth, consistent with economic forecasts — I believe we can wait for greater clarity before adjusting policy,” he said.

Charles Evans, president of the Federal Reserve Bank of Chicago, delivered a similar message in a speech on Wednesday in Riverwoods, Illinois. “I feel we have good capacity to wait and carefully take stock of the incoming data and other developments,” he said.

The remarks were significant because both men spoke in favour of the Fed’s rate increases last year, and both hold rotating votes on the Fed’s policy committee.

James Bullard, president of the Federal Reserve Bank of St. Louis, who opposed the rate increases last year, told The Wall Street Journal on Tuesday that he, too, favoured a pause.

The Fed is “bordering on going too far and possibly tipping the economy into recession,” Bullard said. He added that other Fed officials were coming around to his position that the Fed should pause.

The Fed at its December meeting raised its benchmark rate into a range between 2.25 and 2.5 per cent. It was the fifth consecutive quarterly increase. Powell said the rate now stood near the lower end of the range that the Fed regards as neutral territory — neither encouraging nor discouraging borrowing and economic growth.

At a news conference after the December meeting, Powell emphasised that economic growth remained strong, and that the Fed expected to continue raising rates in 2019. Investors registered their disapproval by driving down asset prices, exacerbating a market slump.

Since then, Powell and other Fed officials have sought to deliver a more nuanced message, emphasising that they are paying attention to investors’ concerns, and that the absence of inflationary pressure means the Fed can afford to postpone judgement.

The account of the December meeting reinforced that message.

The Fed, according to the minutes, said that “participants expressed that recent developments, including the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than earlier.”

The Fed’s own economic outlook remains upbeat. The minutes described economic data in the final months of 2018 as even stronger than the Fed had expected. Rosengren said consumers remained “willing to spend,” and he expected unemployment would continue to fall.

Evans said he was continuing to forecast “another good year in 2019.”

But uncertainties have piled up in recent months. The minutes said investors were particularly concerned about trade tensions between the United States and China, and about global growth. The minutes did not mention that investors also fear that the Fed will make a mistake by raising interest rates too quickly, snuffing out the economic expansion.

The recent downturn in financial markets is both a symptom of these worries and a potential problem in its own right. Declines in invested wealth, or reductions in lending, can infect the broader economy.

The message from Fed officials is that the Fed will wait to see who is correct.

“If the pessimism evident in financial markets eventually shows through to economic outcomes, there would be less need, and perhaps no need, for further increases in interest rates,” Rosengren said. “However, my current expectation is that the more optimistic view will prevail.”

To reinforce that policy decisions will depend on the latest economic data, the minutes said that the officials discussed changes in the Fed’s communications. Since the 2008 crisis, the Fed has leant heavily on “forward guidance” to manage market expectations about its plans. In recent months, it has sought to reduce that guidance, encouraging investors to focus instead on the latest economic data.

At the December meeting, Fed officials also continued to discuss the Fed’s gradual reduction of its holdings of Treasurys and mortgage bonds, which were acquired during and after the financial crisis as part of the central bank’s campaign to stimulate economic growth.

The Fed, which is reducing the holdings at a regular pace, has said that it does not want to adjust that pace in response to changes in economic conditions, preferring to adjust interest rates instead. But the minutes said that Fed officials discussed the possibility of adjusting the pace for technical reasons, as part of the process of determining how large a portfolio the Fed should maintain in the longer term.