Since the Federal Reserve in March embarked on what has become the fastest pace of interest rate hikes since 1981, it has provided minute details about its future plans to tighten monetary policy.
That changed on Wednesday, with Chairman Jay Powell announcing that the US central bank would avoid offering official commentary on its quest to end rising inflation.
“It’s time to go meeting by meeting and not provide the kind of clear guidance that we had provided,” Powell told a news conference after the Fed raised its key interest rate by 0.75 percentage points for the second. next month
By tipping their hand so far, policymakers have tried to manage investor expectations and avoid bouts of extreme market volatility. But the Fed has been burned after outlining its plans, only to quickly reverse course as inflation spiraled further out of control.
After raising rates by half a percentage point in May, Powell sent a clear signal that the Fed would implement similar increases at subsequent meetings. He went so far as to say that a rate increase of 0.75 percentage points was “not something that the committee is actively considering.”
The Fed doubled down on that guidance in the run-up to its June policy meeting, but abruptly reversed course after worse-than-expected inflation data landed during a period of disruption that prevent making public comments. It then implemented the first increase of 0.75 percentage points since 1994.
Earlier this month, the Fed came under more pressure after another alarming inflation report, with investors betting it would abandon its guidance again and raise rates by a full percentage point.
Some economists welcomed the firmer approach on Wednesday, arguing that the central bank needs to be nimble in the face of uncertainty about how far it will need to tighten amid high inflation and a slowing economy. economy
“This meeting was a good step in the direction of not providing forward guidance,” said Tiffany Wilding, US economist at Pimco. “When you’re in a tightening cycle, there’s no real benefit . . . and I’m surprised they’ve kept doing it, frankly, as long as they have.”
Unlike the European Central Bank, which abandoned forward guidance “of any kind” last week, the Fed hasn’t completely abandoned it the next day.
On Wednesday, Powell repeatedly pointed to the much-watched “dot plot” that summarizes policymakers’ projections. The most recent chart from last month indicated that most officials expected the Fed’s main rate to rise to nearly 3.5 percent by the end of the year before reaching 4 percent in 2023. In September a new dot plot will be published.
Powell said it was right to stop providing such detailed guidance because rates are now set at the so-called long-term neutral level, where they would not fuel or dampen economic growth if inflation were at the 2 percent target of the Fed.
Despite Powell’s promise to be more circumspect, he did give some hints about what was planned for the next meeting in September. Investors took advantage of his comment that “it will probably be appropriate to slow the pace of increases,” which led to a rally in stocks and bonds.
However, he also left the door open to “another unusually large rate hike” – meaning an increase of 0.75 percentage points – and said the central bank would “not hesitate” to be even more aggressive if the next data justified a more brutal approach. .
The Fed is moving away from detailed detailed guidance as the economic context becomes more complex. Although the labor market is resilient, there are early signs that business activity has begun to slow, investment is slowing and the housing market is beginning to cool.
Powell welcomed the cooler environment and insisted that price stability was “what makes the whole economy work”. That means growth must moderate and the labor market must become less tight, he said, adding that the risk of doing too little was worse than not being strong enough.
Michael Gapen, chief U.S. economist at Bank of America, said a 0.75 percentage point rate hike in September would be a problem, adding that half-point and quarter-point increases were more likely considering the amount of hardening that has been implemented.
But not everyone is on board with the Fed’s shift to a more dovish approach. Torsten Slok, chief economist at Apollo Global Management, warned that it could lead to more market volatility.
“If they no longer want to communicate strongly about what the expected path for rates is, that will only add to the current discussion in the markets.”
He added: “The market can easily get confused and pick up on anecdotes. . .[and]numbers that normally wouldn’t carry that much weight, because the Fed is dimming the lights on where they’re going.”