Fed Minutes Point Towards Continued, Gradual Interest Rate Increases
October 17 2018 - 1:30PM
Dow Jones News
By Nick Timiraos
WASHINGTON-Federal Reserve officials signaled they see a strong
economy justifying continued interest-rate increases and said they
will watch for evidence their moves are keeping economic growth on
an even keel, minutes of their September policy meeting showed.
The minutes, released Wednesday after a three-week lag, follow
several weeks of effort by Fed officials to emphasize uncertainty
about the precise level of interest rates that will neither spur
nor slow growth, a destination favored right now by most
officials.
The central bank this year has grown increasingly determined to
gradually lift rates to such a neutral setting because the
unemployment rate is below officials' estimates of the level
consistent with stable inflation and the economy is expanding
solidly. The minutes show little consensus so far about what to do
after they determine rates have reached neutral.
Officials voted unanimously at their Sept. 25-26 meeting to
raise their benchmark rate to a range between 2% and 2.25%.
Projections released after the meeting show most officials expected
they would need to raise rates one more time this year and around
three times in 2019 if the economy performs in line with current
forecasts. The projections also revealed most officials believed
interest rates over the long-run should settle around 2.75% or 3%
in order to balance supply and demand.
The big question is how much higher officials think rates need
to go in an environment where the economy is expanding faster than
they expect is sustainable over the long run. The Fed targets a 2%
inflation rate, which it sees as a sign of healthy demand, and
inflation has held near that target in recent months after
undershooting it for years. The Fed wants to avoid economic growth
that becomes unsustainable, leading to a boom and then bust.
While a few participants at the meeting argued the economy would
require the Fed to raise rates beyond a neutral level to
intentionally slow growth and prevent the economy from overheating,
a couple said they would want to see more evidence of inflation
picking up before endorsing such a stance.
Fed officials also removed a phrase from their postmeeting
statement that for years has described their rate stance as
"accommodative," meaning they are pressing on the gas pedal to help
stimulate growth.
Dropping the language did not signal that officials believed
rates were no longer low enough to spur growth, Fed Chairman Jerome
Powell said after the meeting. Instead, the change reflected how
officials, led by him, have sought to move away from providing
overly precise estimates of where such a neutral setting stands
given the inherent uncertainty.
"Interest rates are still accommodative, but we're gradually
moving to a place where they will be neutral," Mr. Powell said at a
conference earlier this month. He played down questions about
whether policy would need to turn restrictive when he said, "We're
a long way from neutral at this point, probably."
The minutes are the latest piece of communications to mark a
shift away from using neutral-rate estimates as an anchor for
upcoming policy decisions.
Many participants at the meeting said future changes in interest
rates would be guided more by "the evaluation of incoming
information and its implications for the economic outlook," the
minutes said. "Estimates of the neutral federal funds rate would be
only one among many factors that the committee would consider in
making its policy decisions."
New York Fed President John Williams, who has conducted leading
research to estimate the real neutral rate of interest, has joined
Mr. Powell in downplaying policy makers' ability to pinpoint such
estimates.
Earlier this year, Mr. Williams said such estimates were shining
brightly in guiding policy makers, but last month he said now that
rates are closer to such a setting, "what appeared to be a bright
point of light is really a fuzzy blur."
The Fed's rate increases became the center of attention at the
White House and on Wall Street after stronger economic data this
month prompted investors to take more seriously the central bank's
telegraphed plans to steadily lift rates higher. President Trump
blamed the Fed for the market selloff and described the central
bank as "crazy" and "out of control."
Before Mr. Trump, U.S. presidents hadn't commented publicly on
monetary policy in more than 25 years. Mr. Powell and other Fed
officials have said they will not be influenced by political
pressure, and the minutes didn't mention Mr. Trump's comments had
made prior to the meeting.
Some officials have upgraded their views about the economy's
growth rate this year, the minutes said. But the minutes didn't
signal major shifts in thinking about the economy's short- or
long-run growth prospects.
Some officials believed tax cuts approved by President Trump
last year had boosted investment spending, but officials also said
their business contacts had foregone other investment or production
opportunities because of uncertainties related to steel and
aluminum tariffs imposed this year by Mr. Trump.
Other Fed officials highlighted buoyant markets as another sign
of strong growth, despite some stresses in emerging markets that
developed this summer. Some officials highlighted potential risks
in corporate lending activity, such as for leveraged loans and in
lending by financial institutions outside the banking sector.
Just how much farther the Fed raises rates will depend largely
on whether inflation behaves as officials expect. Many follow some
version of a framework that posits an inverse relationship between
inflation and unemployment, though many say the relationship has
weakened in recent decades.
In recent speeches, Mr. Powell has appeared sympathetic to
treating traditional models more skeptically than some of his
colleagues or staff.
(END) Dow Jones Newswires
October 17, 2018 14:15 ET (18:15 GMT)
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