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(Bloomberg) – As US Federal Reserve Chairman Jerome Powell and his colleagues meet this week for a policy-making meeting, some of them will likely have 1995 as a goal.
That year, the Fed began a mid-term correction of its monetary policy, lowering interest rates after sustained tightening. Now, some officials and investors are beginning to wonder if the Fed will have to relax after raising rates four times in 2018.
"I see parallels between the period 1995-1996 and what we are currently experiencing," said David Stockton, who worked for the Fed at the time and now works at the Peterson Institute for International Economics. "There is always a fear that you will abuse it after a repeated rate increase.
Powell and his colleagues should generally keep their rates unchanged at their April 30-May 1 meeting. Fed observers will look for clues in the post-meeting statement – or more likely, at Powell's press conference – that the central bank is considering lowering aid rates later in the year.
"I think they're waiting here for a long time, but there is a risk that a drop in inflation will cause them to think about a relaxation," said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York.
Fed Vice President Richard Clarida cited two cases in 1995 and 1998 in which the central bank cut rates to guard against a weakening economy, even though it did not see the recession unfold.
Some Fed observers think that 1995 is the best model for what is happening now.
In 1998, the central bank cut rates three times in quick succession to short-circuit a financial crisis caused by the failure to pay the Russian debt and the near-collapse of the Long Term Capital Management hedge fund. There is no triggering event today.
On the other hand, there are a number of parallels between now and 1995-1996. The Fed then justified its three rate cuts – in July and December 1995 and in January 1996 – citing moderate price pressures.
Policymakers today are even more concerned about the low rate of inflation – and have not concealed their desire to see it increase.
The United States and global growth have also slowed down a quarter of a century ago, or even more so than today.
Other similarities: the Fed continued its downward trend of rates in 1995-1996, even if it judged the labor market quite tense and the share price dynamic. It was in December 1996 that Fed Chairman Alan Greenspan warned of "irrational exuberance" in the financial markets.
And then there is politics. President Bill Clinton was to be reelected in 1996, while Donald Trump would face voters next year.
Clinton has refrained from openly commenting on Fed policy after his economic team told him that public pressure on the independent central bank could prove counter-productive.
Trump was not so reluctant, repeatedly calling on Powell & Co. to open the monetary limits in order to crush the economy and the stock market.
Trump's acolytes argue that his tax cuts and deregulation measures pave the way for a productivity-driven economic boom that will not spur inflation.
If this happened – and many economists are skeptical – it would be as if the growth of the late 1990s was the result of the proliferation of the Internet.
Former Fed Vice President, Alan Blinder, who was leading the charge of lowering rates in 1995, warned against any similarity with today.
A big difference, according to Blinder: the Fed had clearly increased its rates at that time, raising them by 0.75 percentage point in November 1994 and 0.5 point in February 1995 before starting to reduce them in July of the same year.
"We are a little hyper excited," said Blinder, who is now a professor at Princeton University.
It is not so obvious that the Fed has done too much this time. Its 0.25 percentage point rise in December pushed rates barely into neutral territory, where monetary policy does not stimulate growth either.
Mr Blinder said that a rate cut is possible, but he believes that the Fed's next move will likely be an increase. For the moment, "their patient attitude suits me perfectly".
The same goes for Janet Yellen, who also pleaded for a lowering of rates a quarter of a century ago, while she was governor of the Fed.
"It seems to me that monetary policy is well positioned," said the former Fed chairman at an event in Houston on April 10.
Peterson, Stockton, thinks the central bank will eventually cut rates.
"They will buy insurance" at some point, he said. As in 1995-1996, "the risks are relatively low".
To contact the reporter about this story: Rich Miller in Washington at [email protected]
To contact the editors in charge of this story: Brendan Murray at [email protected], Alister Bull, Sarah McGregor
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