When it comes to degrees of difficulty, this week’s Federal Reserve meeting is shaping up as a walk in the park compared to what awaits policymakers down the road. Officials will wish — and should prove able — to sidestep complex issues related to both monetary policy and the new political landscape. But it is likely to be a short reprieve for them, and it will deprive markets of the type of meaningful forward policy guidance that can help contain potentially damaging volatility.
You need only to look at the recent strength of the US economy and indications that inflation is not falling as fast as policymakers expected to understand why the Fed will refrain from cutting interest rates on Wednesday. In the process, it risks reminding many of the old, and once discredited notion of “stop-go” policy.
In successive meetings over just the last six months, the Fed has refrained from cutting (July), implemented a “jumbo cut” of half a percentage point (September), shifted to cutting by a quarter percentage point and signaled a no-drama path of similar cuts to come (October), and cut but U-turned on its policy guidance (December). This week, it will pause its cutting cycle.
Wednesday’s likely decision to keep interest rates unchanged will probably be accompanied by what many would call typical economist hedging. Look for Chair Jerome Powell to point to a variety of economic and policy possibilities. More generally, the Fed will be keen to avoid any major headlines as it maintains maximum optionality of both analysis and future policy action, especially as officials will not be called upon to update publicly their forecasts for the economy and interest rates until the March 18-19 meeting.
This will also allow the Fed to avoid addressing directly the policy implications of the changed political environment at a time when the central bank is already under some pressure. A few days ago, President Donald Trump called for lower interest rates and renewed his questioning of Powell’s competency. Meanwhile, some of Powell’s colleagues appear to be more willing to sound dovish these days. Then there is the market chatter about the de facto appointment of a shadow Fed chair in the run-up to the formal end of Powell’s term in just over a year — a possibility that would encourage the market to look for two sets of forward guidance that may not be consistent.
As none of this is easy to address, it shouldn’t be surprising that Fed officials would be rather keen to punt on both monetary policy and political questions this week. But the underlying issues will not go away. If anything, they are likely to get more complicated in the next few weeks, promising a more consequential March meeting.
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