Business

Fed emphasizes patience - again

'We're going to allow the situation to evolve': Powell

Bloomberg

“Even relative to December, I would probably mark down” a forecast for global growth,” says Richard Clarida, vice chairman of the U.S. Federal Reserve.
Bloomberg “Even relative to December, I would probably mark down” a forecast for global growth,” says Richard Clarida, vice chairman of the U.S. Federal Reserve.
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The Federal Reserve’s top officials say the economy is in a good place and suggest further interest-rate increases will depend on incoming data easing concerns about risks to their outlook.

Comments in the past few days by Chairman Jerome Powell and No. 2 Richard Clarida lay out clear lines of debate when the Federal Open Market Committee, of FOMC, meets later this month.

“Their baseline outlook is solid, but the clear discussion is risks are skewed to the downside,” said Michael Hanson, chief U.S. macro strategist at TD Securities in New York.

Officials will release fresh quarterly forecasts at the March 19 and 20 FOMC meeting. What’s becoming clear is their outlook for U.S. growth could be downgraded and their December estimates for hiking twice in 2019 could get pared back.

Investors currently expect them to keep rates on hold all year, according to pricing in interest rate futures.

“Even relative to December, I would probably mark down” a forecast for global growth, Clarida told the National Association for Business Economics Thursday.

Among officials’ top concerns are a cooling world expansion, somewhat tighter financial conditions, and policy uncertainty around trade disputes and due to Brexit.

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The new buzzword on the Fed’s policy committee is “patient.” They used it in their January statement and the meaning has been further developed through speeches and two days of testimony by Powell before Congress this week.

What’s become clear is that Powell and Clarida are willing to let inflation measures tell them whether the Fed’s benchmark policy rate is too low or high. They don’t have a strong conviction on whether it should still be heading higher.

“Their view on how close they are to restrictive territory will be dependent on how inflation evolves,” said Robert Martin, executive director at UBS Securities in New York. “They want the data to teach them where they are.”

The concept is so important, that Powell voluntarily reiterated it at the close of his hearing in the Senate on Tuesday — just in case lawmakers didn’t hear him the first time.

“We’re going to be patient. What that really means is that we’re in no rush to make a judgment about changes in policy,” Powell told the Senate Banking Committee Chairman Mike Crapo.

“We’re going to allow the situation to evolve.”

The Fed chief reiterated that idea in a speech on Thursday evening in New York.

Whatever forecasts officials do make in March are surrounded by uncertainty. The same was true for their December projections, minutes of that meeting later revealed.

But they fumbled the communication, spooked markets by sounding too committed to further rate hikes, and have engaged in a two-month speaking campaign to reverse the damage.

“It was a disastrous, circuitous route to get where they are, but they are happy they are there,” said Mark Spindel, head of Potomac River Capital and co-author of a book on the Fed, referring to the recent pause in rate hikes.

“They really think they are in a great spot.”

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Another feature of the patience doctrine is that a policy of jumping ahead on rates based on a forecast of higher inflation, known internally as pre-emption, has been retired.

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