Fed Seen Balking Again at Providing Fresh Interest-Rate Guidance

Federal Reserve officials will link interest-rate increases to inflation outcomes when they provide more guidance on the future path of monetary policy, economists said in a Bloombergsurvey. They’re just not sure when that guidance is coming.

The Federal Open Market Committee meets Sept. 15-16. Just 39% of respondents to the Sept. 4-10 poll said they expect officials to alter their guidance next week. Almost a third don’t predict the change until 2021, or later. They also saw the central bank’s updated quarterly projections showing interest rates near zero through 2023.

“The Fed will adopt explicit guidance, but it could take years before it is necessary because the FOMC is likely to wait until the market starts pricing in rate hikes,” Christopher Low, chief economist at FHN Financial, said in comments submitted with the survey.

When new guidance does come, 65% of economists expect an approach linked to inflation, either alone or combined with another criteria.

Investors are keen for a fresh steer from the Fed, especially after Fed Chair Jerome Powell on Aug. 27 unveiled a newlong-run strategy for achieving the central bank’s goals of maximum employment and price stability.

Powell said the Fed will sometimes allow price increases to run a bit higher than its 2% target in pursuit of inflation that averages that level “over time.” Officials will also allow unemployment to run lower than they had previously tolerated, he said.

Less Predictable

The Fed has so far not made clear how the new longer-run strategy will influence their near-term policy decisions as it tries to help lift the U.S. economy out of the recession triggered by the coronavirus pandemic. That has made policy less predictable for some observers, not more.

“Until the Fed defines the time frame for determining the average inflation rate, monetary policy will become even more discretionary,” said Lynn Reaser, chief economist and a professor at Point Loma Nazarene University.

Still, the median outlook for rates among economists remained flat, essentially at zero, to the survey’s horizon in 2023.

Expectations for the Fed to apply yield caps to Treasury securities — an approach known as yield-curve control — continued to fade. Just 35% of economists now say the Fed will eventually use that tool, down from from43% in July and54% in June.

Respondents had somewhat contradictory reactions to the Fed’s new longer-run strategy.

More than 60% said they agreed or strongly agreed that the new approach would enhance the Fed’s ability to achieve its objectives. A majority also said the new strategy would help, over time, lower the gap between Black and White unemployment levels in the U.S.

Despite those positive reactions, most economists said the shift had not prompted them to revise their expectations for future inflation, unemployment or interest rates. More than 70% also said they didn’t expect the Fed to achieve its new 2% average inflation target until 2024 or later, though one respondent noted reaching that milestone would rely on more than just monetary policy.

“It will take a while to create inflation where none exists, and it will take some level of consistent policy — fiscal and monetary — to accomplish it,” said Stephen J. Taddie, partner at HoyleCohen, LLC.

Asked to rate the level of risk associated with potential unwanted consequences from the strategy shift, respondents pointed decisively to financial bubbles, with 34 out of 37 rating the risk as “moderate” or “high.”

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