The US Federal Reserve followed its own playbook pretty closely this week, yesterday raising the benchmark federal funds rate a quarter point to 2.00-2.25 as expected. It also dropped the word “accommodative” from the description of its monetary policy as interest rates approach the neutral rate that neither stimulates nor dampens the economy.
In his opening remarks at the press conference following the two-day meeting of the Federal Open Market Committee (FOMC), Fed chair Jay Powell emphasized, however, that this change in language doesn’t mark a shift in policy. “Instead, it is a sign that policy is proceeding in line with our expectations,” he said. And that policy of gradual increases in the federal funds rate will stay on course, he added.
The closely watched dot-plot graph of members’ forecast for interest rate levels confirmed the markets’ overwhelming expectations for a fourth hike this year, which would raise the level to 2.25-2.50. That same graph showed a majority of the 16 policymakers expecting three rate hikes in 2019, which would bring the overnight rate to 3.0-3.25.
More significantly, FOMC members raised their median expectations for US economic growth this year to 3.1 percent, compared with 2.8 percent at their June meeting and 2.7 percent in March. This forecast of faster growth also moved the needle on 2019 as well, with the median set at 2.5 percent, compared to 2.4 percent forecast in June.
Faster growth could prompt the Fed to pick up the pace on interest rate hikes. Powell said that fiscal policy clearly is boosting the economy, but as yet there are no signs of a pickup in inflation.
Addressing the Trump administration's current policy on trade, Powell noted that FOMC members have anecdotal indications from encounters in the Fed districts that current trade disputes are bringing supply chain disruptions and other supply-side constraints. But, he said the present level of tariffs affect too small a part of the economy to see any impact in statistics.
There were no surprises in the Fed statement or Powell’s remarks. Those hoping for a faster pace of rate hikes to benefit banks were disappointed, and that sector finished in the red after yesterday's announcement.
Powell's assessment was candid, that policymakers don’t really know what’s going to happen. If inflation accelerates, the Fed could increase its pace on raising rates Powell said. But, “we don’t see that,” he said. “We really don’t see that.”
President Trump expressed his disapproval of the new rate hike, but there’s reason to doubt his heart was his really in it. For one thing, he quickly added that higher rates do benefit Americans who rely on interest on savings for income. For another, he continues to nominate fairly pragmatic—and highly qualified—economists to the Fed, individuals who have demonstrated little interest in easy money.
When asked Wednesday about the influence of Trump’s opinions on FOMC deliberations, Powell affirmed that the Fed is guided only by economic theory and data, not by politics. “That’s who we are,” he said. “That’s what we do. And that’s just the way it’s always going to be for us.”
When asked whether he was consulted by the president on Fed nominations, Powell acknowledged that was the case, though of course the decision rested with the president. The most recent nomination to the board of governors was economist Nellie Liang, who spent three decades at the Fed before retiring and joining the Brookings Institution. Powell reportedly has been calling Republican senators to urge her confirmation.
At Wednesday's press conference, Powell said he was excited about the team being built at the board, and he was looking forward to filling the empty offices on his floor. Columbia University economist Richard Clarida was confirmed last month by the Senate and took part in the FOMC meeting for the first time. Needless to say, he was part of the unanimous vote in favor of the consensus statement. Two other Trump nominees, Kansas banking commissioner Michelle Bowman and Carnegie Mellon economist Marvin Goodfriend, await Senate confirmation.