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FILE PHOTO: The Federal Reserve building is photographed in Washington, DC, United States, August 22, 2018. REUTERS / Chris Wattie / File PhotoReuters
WASHINGTON (Reuters) – Global growth and volatile financial markets put the US Federal Reserve out of action in early 2016 and it took nearly a year for officials to regain confidence. Growth continued and convinced investors to raise interest rates.
Fed policymakers are facing similar conditions this week, with market skepticism about further rate hikes three years ago and a stalemate in global trade, the closure of the US federal government and the loss of business and consumer confidence. (Graph: https://tmsnrt.rs/2B6xrKy)
Policy makers made it clear that they were planning a "patient" break in rate hikes. For Fed Chairman Jerome Powell, the challenge is to take a break before letting the public believe that the current round of Fed interest rate hikes has completely stopped.
"In reality, it's the second half of the year," said Robin Brooks, chief economist at the Institute of International Finance, said Robin Brooks, chief economist of the US recovery . Although some current conditions are healthier than in 2016, with a historically low unemployment rate, for example, "which is different from the negative side, it's the amount of noise generated in the system" .
This includes issues such as the US-China trade dispute that could be resolved quickly, dispel some of the doubts that are slowing corporate spending, and improve the Fed's outlook.
But policymakers are no longer in a hurry, some hesitant to provide "months" that may be needed for risks to subside enough to approve the next of two expected rate hikes for the year.
Even that can be optimistic. While economists polled by Reuters this month are seeing these delayed increases of one quarter compared to those of December, the financial markets do not expect any rate hike in 2019. [nKCN1ON13U https://www.reuters.com/article/us-usa-fed-futures/rate-futures-market-says-fed-is-all-but-done-with-hikes-idUSKCN1ON13U]
Some economists now believe that the central bank's next move will be to ease monetary policy, either by reducing interest rates or by slowing down the Fed's monthly balance sheet, which is an additional tightening, no matter how small. it, of the economic situation.
The balance sheet run of $ 50 billion a month was designed as a non-controversial way to reverse the build-up of billions of billions of dollars by the Fed during the financial crisis of ten years ago. But markets and President Donald Trump have put increasing pressure on the central bank to slow down the process or stop altogether.
For Steven Blitz, US economist at TS Lombard, the Fed "needs an elegant way to backtrack", a three-year tightening cycle that is expected to continue next year. He said he foresaw that the Fed will announce its new plans by amending the balance sheet program at this meeting or at the next meeting in March, and that it be forced to cut rates later in the year. l & # 39; year.
The Fed's Jan. 29-30 meeting this week is the first in 2019. Policy makers will not release any rate forecasts or economic forecasts, but Powell is expected to hold the first of eight post-press conferences. meeting scheduled for the year, one after each session of the Federal Open Market Committee.
This marks a change from the previous practice of informing the media after each meeting, a step that, according to Powell, will increase public transparency and force investors to treat each Fed session in the same way.
It also doubles the risks of miscommunication, and next week's appearance will pose "tricky" problems while Powell suspects that a strong US economy could justify higher rates to combat the slowdown in Global growth and fears of widespread recession in the financial markets, said a JP Morgan economist Michael Feroli said in a preliminary badysis of the Fed's next session.
"We believe that they will try to avoid giving the impression that the break is equivalent to a break (or even a reduction) or that the economic outlook has deteriorated considerably."
The Fed has rarely followed a long pause in rate hikes with a new, stronger push. The last time this happened, it was in the mid-1990s, during the period of "great moderation," characterized by steady growth and rising productivity.
That is what Powell may need to design, relieving for the moment anyone who is worried about the magnitude of a possible slowdown without promising that rates will increase further, and clarifying in course of course what could happen to the balance sheet.
"The essential debate (…) is whether the FOMC would still prefer to signal to the market that the next interest rate change is likely to be higher or it needs to focus on the patience and completely suppress rate forecasts, "wrote Barclays economist, Michael Gapen. The latter, he said, could appease the markets today, but pave the way for "undesirable volatility later" if the Fed were to take the plunge again.
(Report by Howard Schneider, edited by Tomasz Janowski)
Copyright 2019 Thomson Reuters.
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