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Fed Officials Push Back on Updated Rate Guidance at Next Meeting

Forex Sep 03, 2020 05:09PM ET
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© Bloomberg. Charles Evans, president of the Federal Reserve Bank of Chicago, speaks during the Global Interdependence Center (GIC) Central Banking Conference in Mexico City, Mexico, on Thursday, Feb. 27, 2020. Mexico's central bank slashed its growth forecast for this year and said it will take longer than expected for inflation to slow to target, suggesting policy makers have limited room to lower borrowing costs to stimulate the economy.

(Bloomberg) -- Two Federal Reserve officials downplayed the chances of updated public guidance on the path of interest rates at their upcoming policy meeting, suggesting they would need more clarity on the outlook for the economy first.

“If I had a better idea of where we’re going to be next spring, and things like that, I’d know whether or not we need to ramp up extraordinarily accommodative policies like we did during the last recovery,” Chicago Fed President Charles Evans told reporters Thursday after delivering a speech at a virtual event.

Atlanta Fed President Raphael Bostic offered similar comments during an earlier interview broadcast by the Wall Street Journal. They were the last Fed officials scheduled to speak ahead of a blackout period on public comments preceding the central bank’s Sept. 15-16 policy meeting, and their views echoed remarks from other policy makers.

The Fed’s rate-setting committee has said it won’t raise interest rates from nearly zero until the economy is “on track” to achieving maximum employment and 2% inflation. Officials have debated providing more clarity on that guidance “at some point” to offer more support for the economy, according to minutes of their last meeting in July. The idea is that reinforcing expectations for low rates will reduce longer-term borrowing costs as well and boost activity. Such a move doesn’t sound imminent.

Lot of Uncertainty

“Right now I don’t think there’s a lot of uncertainty about the Fed’s commitment to supporting the economy and supporting the recovery so that we get to something that looks like a much more natural progression of the economy,” Bostic said.

“As we get to that period when it’s clear to everyone that we are transitioning out of an emergency setting into a more stable setting, that’s when I think the kind of forward guidance and clarity you are talking about will become more important,” he told the interviewer. “I don’t think we are there right now.”

Fed Chair Jerome Powell on Aug. 27 unveiled a major shift in the central bank’s long-term strategy for setting interest rates. In the new framework, officials will allow the inflation rate to rise above their 2% target following periods of below-target inflation with an aim toward averaging 2% over time. That means waiting longer to tighten monetary policy as inflation rises than in the past.

Liftoff Thresholds

Investors are on the lookout for updated guidance that reflects the new strategy, which Fed officials have said may, when it eventually comes, take the form of specifying thresholds for unemployment and inflation that must be achieved before any rate hikes.

Evans compared the current situation to that in 2012 -- three years after the 2008-09 recession had officially ended -- when the U.S. central bank launched its third round of asset purchases, known as quantitative easing, and deployed such threshold-linked guidance.

“Remember, the open-ended QE3 and threshold forward guidance that we embarked upon in September and December of 2012 was after we had fiscal austerity and the debt ceiling limit crisis,” the Chicago Fed chief said. “So, I think we have to know more. Can’t make that judgment now.”

Fed officials published quarterly projections in June indicating it was unlikely that they would begin raising rates before the end of 2022. At the conclusion of the Sept. 15-16 meeting, they will publish a new set of projections that extend through the end of 2023.

©2020 Bloomberg L.P.

Fed Officials Push Back on Updated Rate Guidance at Next Meeting
 

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