Beckner: Powell: Funds Rate Could Become Restrictive But Not The Aim

Written exclusively for InTouch Capital Markets

26th September 2018


By Steven K. Beckner

WASHINGTON – Federal Reserve Chairman Jerome Powell was as clear as a monetary policymaker can be Wednesday, elaborating on the Federal Open Market Committee’s latest “normalization” move: so long as the economy fulfills expectations the Fed will keep raising short-term interest rates, but not with any particular objective of becoming restrictive.

Powell said the economy is in “a very bright spot” that warrants another step on the path toward “a gradual return to more normal levels.”

As expected, the FOMC raised the federal funds rate 25 basis points to a 2-2.25% target range. Other administered rates were lifted commensurately.

In raising the funds rate for the third time this year (eighth since December 2015), the FOMC brought the funds rate close to some calculations of the short-run “neutral” rate. Accordingly, the Committee stopped saying monetary policy “remains accommodative.”

But Powell told reporters rates “remain low” and “still accommodative” from a long-term perspective. Removal of that passage “does not signal any change in the likely path of policy,” he said, adding the forward guidance phrase had simply “served its purpose.”

The new target range leaves the funds rate well short of the “longer run” funds rate estimate, which the FOMC revised up a tenth to 3.0%. If FOMC projections are realized, the funds rate will surpass that neutral rate and turn restrictive by late 2019, becoming even less accommodative in 2020.

Responding to my question about further upward revisions in the neutral rate that could make future rate hikes seem less restrictive, Powell said it’s possible he and his colleagues will do so if productivity and the economy’s growth potential rise, but said they have to be “humble” about such predictions.

Validating expectations of a fourth hike in December, the FOMC again foresaw “further gradual increases” in a “strong” economy with “strengthened” labor markets, inflation “near 2%” and “roughly balanced” risks. Participants again projected a median funds rate of 2.4% at year’s end.

Despite upgraded GDP forecasts, funds rate projections for 2019-20 were left unchanged. As in June, officials projected three 2019 rate hikes, leaving the funds rate in a 3.0-3.25% range and one 2020 move, pushing it to 3.25-3.50%. They projected the same rate for 2021.

Powell said “it’s possible” policy will become restrictive, noting some of his colleagues had projected “modest overshoots” of the neutral rate. But he said the FOMC’s aim is not to become restrictive, but to set rates appropriately as the economy evolves. The real question, he said, is “how much support we provide” to sustain a non-inflationary expansion.

As always, he allowed for deviation in one direction or the other — raising rates more if the Fed sees inflationary overheating, less if the economy “falters.” So far, he said, there is no overheating. He called financial stability vulnerabilities “moderate.” Nor did he see much evidence that trade tensions are hurting the economy — yet.

The FOMC authorized balance sheet reduction to proceed on schedule, increasing total caps above which securities will be rolled over or reinvested to $50 billion per month in the fourth quarter.