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A Not-So-Major Change

Some market watchers and headlines are heralding recent decisions by the Federal Reserve to slow the rate of increase in the federal funds rate as a major shift in policy. I like what is being done, but I respectfully disagree that it is a fundamental change.

In the press conference following the December meeting of the Federal Open Market Committee (FOMC), Chairman Powell indicated that changing conditions led to a reduction in the likely number of 2019 rate increases from three to two. Just one month later, after the January meeting, he stated that due to global economic and financial developments and lower inflation pressure, the FOMC is going to take a patient “wait-and-see approach” to future rate increases. I wouldn’t call this announcement a policy shift. All of the things the Fed had to do in the financial crisis ten years ago were major departures; this one is just business as usual.

Chairman Powell pointed out that the change was not driven by the baseline outlook for the US economy and that the FOMC is still expecting expansion of economic activity, strong labor market conditions, and inflation near the 2% target rate. Given that the Fed’s mission, which hasn’t changed in 70 years, is to maximize employment while keeping inflation under control, if either of these appeared to be changing in ways that inform policy, the FOMC would be more likely to react. However, inflation pressure is diminished and the risk of financial imbalances and excesses has fallen back to near historic norms.

Additionally, there are signals of diminished growth prospects for economies around the world, with uncertainty such as how Brexit will be achieved dampening expansion prospects. The rate of expansion of the Chinese economy is also slowing, and trade deals between the US and China and the North American nations are not yet finalized. A sudden threat to impose tariffs on German cars has also surfaced.

Holding off on rate increases at this time is being heralded as a major reversal in policy. It is not! The Federal Reserve has simply continued the policy put in place decades ago and reiterated many times, to monitor the economy and inflation and adjust rates accordingly.

Every word the Federal Reserve Chairman utters is analyzed and each phrase in the press releases, minutes, and speeches will be parsed to a ridiculous extreme. Overreacting or reading too much into what is said is common. The bottom line is that Chairman Powell and the rest of the FOMC will be watching for signs of slowing growth or rising inflation as they always have been. The policy hasn’t changed (and it shouldn’t); the economy is just sending somewhat different signals.