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Fed weighs adopting wait-and-see policy on future rate rises

The Wall Street Journal. logo The Wall Street Journal. 12/6/2018

Federal Reserve officials are considering whether to signal a new wait-and-see mentality after a likely interest-rate increase at their meeting in December, which could slow down the pace of rate increases next year.

Officials still think the broad direction of short-term interest rates will be higher in 2019, according to recent interviews and public statements. But as they push up their benchmark, they are becoming less sure how fast they will need to act or how far they will need to go and want to assess how the economy is holding up under moves they’ve already made.

How they manage this new, less-predictable approach will depend in large part on the performance of the economy and markets in the weeks ahead.

Under the evolving “data dependent” strategy, the Fed could step back from the predictable path of quarterly hikes it’s been on for most of the past two years, raising the possibility it might delay rate increases at some upcoming meetings, according to recent interviews and statements.

Under the old pattern, the Fed would raise rates again in March, but officials now don’t know when their next rate move will be after December.

Recent market turbulence for now hasn’t much dented the Fed’s view that the U.S. economy is on solid footing, with growth strong and unemployment low. But inflation has softened in recent months and falling oil prices portend further declines, reducing the Fed’s sense of urgency about raising rates to prevent the economy from overheating.

Of course, if growth or inflation heats up unexpectedly, the Fed could decide to go further than planned.

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Federal Reserve Chairman Jerome Powell compared the Fed’s policy strategy to walking into a living room when the lights suddenly go out.

“What do you do? You slow down and you maybe go a little bit less quickly, and you feel your way more,” he said in a speech last week. “So under uncertainty of this kind, you be careful.”

The next important data release comes Friday, when the Labor Department releases November employment data.

Officials are intensely reviewing how to communicate any shift from the predictable path of quarterly increases they’ve been on for the past two years.

As part of its shifting plans, officials are weighing how to modify language in a central bank policy statement that since December 2015 has described plans for “gradual increases” in the fed-funds rate. In January, officials qualified the phrase by adding the word “further” to signal greater conviction in their plans.

Beginning at their Nov. 7-8 meeting, officials discussed ways to walk this language out of the statement over the course of several meetings, given their increased uncertainty about how much further to go and at what pace.

“We shouldn’t be offering guidance if there’s this much uncertainty about the future path of interest rates,” said Minneapolis Fed President Neel Kashkari in an interview. If that guidance “ends up being wrong, it hurts or undermines our credibility.”

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