By Jamie McGeever
ORLANDO, Florida (Reuters) – If the Federal Reserve ‘skips’ raising interest rates next week only to tighten monetary policy again a month later, which is what some U.S. central bank officials are indicating and markets are pricing, it will be the shortest pause in the modern era.
Since Alan Greenspan began his 19-year tenure as Fed chief in 1987 and the central bank moved towards a 2% inflation-targeting policy framework in the 1990s, it has never paused a hiking cycle for just one meeting.
It has raised rates at alternate meetings, most recently in 2017 and 2018, and also held fire for six months in 2017. But a one- or even two-meeting break just as the end of the cycle is coming into view would be unique.
The question is, why bother?
That’s especially pertinent when you consider that U.S. unemployment is near a 50-year low and inflation is still well above target, and unlikely to get back there until 2025, according to Fed policymakers’ own median forecast.
Equally, if you are wary of the ‘long and variable’ lag of 500 basis points of rate hikes in little over a year – the most aggressive tightening campaign in four decades – and the cycle end is in sight, why bother skipping one meeting?
However, a one-off pause would not be unique globally.
The Reserve Bank of Australia seems to have executed a one-meeting ‘skip’, but perhaps more by accident than design. Its rate hikes last month and this week were major surprises to financial markets.
To cut policymakers everywhere a large slice of slack, the post-pandemic economic and inflation landscape is unlike anything seen before. The usefulness of old forecasting models has been patchy, at best, so it figures that policy responses and their effectiveness have been unique too.
Signaling a one- or even two-meeting break from raising rates is likely a communications tactic aimed at buying policymakers more time to judge what to do next – but also reining in markets from betting the cycle in done.
But it is risky.
John Silvia, founder of Dynamic Economic Strategy, agrees it may have merit as a policymaking tactic, but makes little sense from an economic perspective – the economy is not in recession and inflation is still way too high.
“So why are you skipping this meeting? Do you then skip July, and September? You have to ask why are you doing this, then it becomes a credibility issue – you say your inflation goal is 2% but you’re not pursuing 2%,” Silvia said.
FINGER IN THE WIND
Given the policy-setting Federal Open Market Committee’s meeting schedule, there will be nearly two full months worth of incoming data after the July 26 decision for Fed Chair Jerome Powell and his colleagues to assess before their next decision on Sept. 20.
That’s a significant chunk of time. Leaving open the possibility in July of another 25-basis-point hike two months later could prevent financial conditions from loosening too much.
The Fed wants policy to be restrictive, and financial markets to move accordingly.
The notion of a pause then tightening again was first floated by Dallas Fed President Lorie Logan in January, but dismissed by Powell two weeks later after the Fed raised its federal funds target range by 25 basis points to 4.50%-4.75%.
Philadelphia Fed President Patrick Harker and Fed Governors Christopher Waller and Philip Jefferson in recent weeks have introduced ‘skip’ and ‘skipping’ into Fed-watchers’ lexicons. Until then, a pause was generally assumed to lay the ground for rate cuts, not a resumption of rate hikes.
The Fed’s shortest hiatus in the modern era was six months in the second half of 2017. Then, 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%.
The Fed will hope it can convince markets that a ‘skip’ is not a pivot, and some may see it as the logical next stage in a gradual slowing of policy tightening – the size of the rate hikes since November has gone from 75 bps to 50 bps to 25 bps.
‘Skipping’ a meeting would be rare, but in the post-pandemic world of extremely low visibility, perhaps 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 (LON:). “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.”
(The opinions expressed here are those of the author, a columnist for Reuters.)
(By Jamie McGeever; editing by Paul Simao)