Since the Federal Reserve in March embarked on what has become the fastest pace of interest rate rises since 1981, it has provided painstaking detail about its future plans to tighten monetary policy.
On Wednesday, that changed, with chair Jay Powell announcing the US central bank would shy away from offering an official running commentary on its quest to stamp out soaring inflation.
“It’s time to just go to a meeting-by-meeting basis and to not provide the kind of clear guidance that we had provided,” Powell said at a press conference after the Fed increased its main interest rate by 0.75 percentage points for the second month in a row.
By tipping their hand thus far, policymakers have tried to manage investor expectations and avoid bouts of extreme market volatility. But the Fed has been burnt after giving a blow-by-blow account of its plans, only to then hurriedly change tack as inflation spiralled further out of control.
After raising rates by half a percentage point in May, Powell sent a clear signal that the Fed would implement similar increases at subsequent meetings. He went so far as to say a 0.75 percentage point rate rise was “not something the committee is actively considering”.
The Fed doubled down on that guidance as the June policy meeting approached, but abruptly changed course after worse than expected inflation data, which landed during a blackout period that prevented it from making public comments. It then implemented the first 0.75 percentage point increase since 1994.
Earlier this month, the Fed came under further pressure after another alarming inflation report, with investors betting it would abandon its guidance again and raise rates by a full percentage point.
Some economists on Wednesday welcomed the more tight-lipped approach, arguing that the central bank needs to be nimble in the face of uncertainty about how far it will need to tighten against a backdrop of high inflation and a slowing economy.
“This meeting was a good step in the direction towards not providing forward guidance,” said Tiffany Wilding, a US economist at Pimco. “When you’re in a tightening cycle, there’s no real benefit . . . and I’ve been surprised that they’ve kept doing it, frankly, as long as they have.”
Unlike the European Central Bank, which last week ditched forward guidance “of any kind”, the Fed has not abandoned soothsaying altogether.
Powell on Wednesday repeatedly pointed to the closely watched “dot plot” that summarises policymakers’ projections. The most recent graph from last month signalled that most officials foresaw the Fed’s main rate rising to almost 3.5 per cent by the end of the year before hitting closer to 4 per cent in 2023. A fresh dot plot will be published in September.
Powell said it was right to stop providing such detailed guidance because rates are now in line with the so-called long-run neutral level, where they would neither fuel nor restrain economic growth if inflation were at the Fed’s 2 per cent target.
Despite Powell’s pledge to be more circumspect, he did provide some hints as to what was in store for the next meeting in September. Investors seized on his remark that it “likely will become appropriate to slow the pace of increases”, which prompted a rally in stocks and bonds.
However, he also left the door open to “another unusually large rate rise” — that is, a 0.75 percentage point increase — and said the central bank “wouldn’t hesitate” to be even more aggressive if forthcoming data warranted a more hawkish approach.
The Fed is edging away from detailed forward guidance as the economic backdrop becomes more complex. Although the jobs market is resilient, there are early signs that business activity has begun to decline, investments are slowing and the housing market is starting to cool.
Powell welcomed the cooler environment and insisted price stability was “what makes the whole economy work”. That means growth needs to moderate and the labour market has to become less tight, he said, adding that the risk of doing too little was worse than not being forceful enough.
Michael Gapen, chief US economist at Bank of America, said a 0.75 percentage point rate rise in September would be a tall order, adding that half-point and quarter-point increases were more probable given how much tightening has been implemented.
But not everyone agrees with the Fed’s shift to a more taciturn approach. Torsten Slok, chief economist at Apollo Global Management, warned it could result in more market volatility.
“If they no longer want to communicate strongly about what the expected path of rates is, that’s going to just magnify the current discussion in markets.”
He added: “The market can easily get confused and latch on to anecdotes . . . [and] numbers that normally would not get that much weight, because the Fed is dimming the lights on where they are going.”