Fed Interest-Rate Plan: Even Lower for Even Longer
In opting not to raise interest rates, the Fed painted a decidedly dovish picture of what its policy will look like in the years ahead.
By Justin Lahart
Photo: shawn thew/European Pressphoto Agency
Lower for even longer.
The surprising thing coming out of the Federal Reserve’s meeting on Thursday wasn’t so much policy makers’ decision to keep rates on hold. Rather, it was that what had been expected to be a closely fought decision on whether to raise rates for the first time in nine years doesn’t seem to have been very contentious.
The Fed’s postmeeting statement said that Jeffrey Lacker, the hawkish President of the Federal Reserve Bank of Richmond, preferred to raise the Fed’s target range on overnight rates. But the overall tone was dovish, emphasizing how troubled economies abroad and unsettled financial markets could weigh on the U.S.
That is supportive of bond prices, even as stocks may struggle in the face of still-sluggish global growth.
Underscoring the lower-for-longer view, updated projections showed that Fed officials expect to raise their target range on overnight rates just once in their two remaining meetings this year. And several were calling for no change.
Moreover, the median, longer-run projection for overnight rates fell to 3.5% from 3.75% in June, and 4% at the start of last year. So, even when the storm from overseas passes, officials don’t think rates will need to be as high as they used to.
This may stem from a growing recognition of just how hard it may be for the Fed to reach its 2% target for inflation.
And inflation’s trend has been well below 2% for some time now. Since the recession’s start at the end of 2007, core prices have averaged a gain of just 1.5% annually—to be expected, perhaps, since the period encapsulates a severe economic downturn. But in the 10 years before that, core inflation averaged 1.8%.
The persistence of low inflation also suggests the economy might be able handle tighter labor markets, and Fed officials took a step in this direction. Their median estimate of the longer-run unemployment rate slipped to 4.9% from 5% in June. Further, they now expect the unemployment rate to run slightly below that level, at 4.8%, over the next three years.
That suggests a willingness to try to get inflation higher by letting the job market run a little hot.
For investors, the overall message is that even though the Fed is still aiming to raise rates before the year is out, it is by no means a sure thing. Especially with incoming data suggesting that inflation in the fourth quarter will if anything come in below the Fed’s projections.
And even if that rate increase does come, the hurdle to future moves looks high, contingent not just on strong jobs growth but on a real sense at the Fed that inflation is turning higher.
They say don’t fight the Fed, but for now the Fed doesn’t seem to have much fight in it.