Federal Reserve Officials Indicate Possible Pause in Interest Rates
Shortest Pause in Modern Era
Reports claim that some US central bank officials are indicating that the Federal Reserve may ‘skip’ raising interest rates next week but intends to tighten monetary policy yet again a month later. This prospect would create the shortest pause in the modern era since Alan Greenspan’s Fed chief began in 1987, and the central bank made a move toward the 2% inflation-targeting policy framework in the 1990s.
One-Meeting Skip Approach
It is worth noting that since these developments occurred, the US central bank has not stopped hiking up rates for just one meeting. The bank has raised rates during alternate meetings and abstained from booking interest rates for half a year in 2017. Yet, there are no economic circumstances indicating that a one-off pause is the only logical step to take at this time. The Reserve Bank of Australia also seems to have executed a one-meeting “skip,” although by accident instead of by design.
The Spread of the Post-Pandemic Economic Climate Worldwide
Usually, cutting policymakers everywhere a large slice of slack, the post-pandemic economic and inflation landscape is entirely unlike anything seen before. In fact, the usefulness of old forecasting models has been patchy at best, so it seems policy responses and their efficacy are unique too. The decision to signal a one- or two-meeting break from raising interest rates is likely a communications tactic aimed at buying policymakers more time to judge what to do next. The tactic also aims to bring markets in line with predictions and betting cycles.
Policy Makers’ Approach
The policy-setting Federal Open Market Committee meeting schedule it seems will have almost two full months’ worth of incoming data reserved after the July 26 decision. The decision will assist Fed Chair Jerome Powell and his colleagues to evaluate before their next decision on September 20. The Fed wants policy to be restrictive, and financial markets to move accordingly.
Theoretical Implementation of a ‘Skip’
The notion to ‘skip’ raising interest rates followed Dallas Fed President Lorie Logan’s introduction in January, but Powell disregarded the idea two weeks later after the Fed raised its federal funds target range by 25 basis points to 4.50%-4.75%. Philly Fed President Patrick Harker, along with Fed Governors Christopher Waller and Philip Jefferson, introduced ‘skip’ and ‘skipping’ into Fed-watchers’ lexicons in recent weeks. Until then, a gap in interest rate changes was mostly assumed to lay the groundwork for rate cuts, not a resumed rate hike. However, headline and core annual inflation as measured by the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) Price Index were mostly below 2%, and the unemployment rate was between 5.0% and 5.2%.
Rare ‘Skip’ Occurrence is Fitting in the Post-Pandemic World
Although rare in occurrence, ‘skipping’ a meeting in the post-pandemic world of extremely low visibility perhaps seems fitting. “Forecasting is always finger in the wind, but the good thing is that now they (policymakers) know it,” said Lou Crandall, chief economist at Wrightson ICAP. “The Fed at different times has expressed misgivings about locking itself into metronomic patterns, and they have certainly not been on one in this cycle.”