For the Federal Reserve, a New Chief but Same Interest-Rate Path

Jerome Powell is stressing continuity as he takes over as Fed chairman, which suggests the central bank will keep gradually raising interest rates this year, unperturbed by recent market volatility and signs of firming inflation.

Fed officials are on track to raise interest rates at their March meeting, as widely anticipated by investors.

A bigger question for markets is whether officials pencil in a total of three rate increases this year, as they did in December, or if strong growth and new fiscal stimulus prompt them to add a fourth.

Policy makers don’t see such projections as particularly consequential now, according to recent interviews and public statements, because they’ll have plenty of time to adjust their plans as the year unfolds.

“While the challenges we face are always evolving, the Fed’s approach will remain the same,” said Mr. Powell at his swearing-in ceremony earlier this week. “We are in the process of gradually normalizing both interest-rate policy and our balance sheet with a view to extending the recovery.”

The Fed has raised its benchmark short-term rate five times since December 2015 to a range between 1.25% and 1.5%.

Officials have largely shrugged off the stock market’s recent turbulence as unlikely to hurt the economy, which has been growing at a solid pace. It would take a more serious financial-market disturbance to prompt a change in plans.

“My outlook hasn’t changed because the stock market is a little bit lower than it was a few days ago,” said New York Fed President William Dudley last week. “It’s still up sharply from where it was a year ago.”

Before the market selloff earlier this month, officials had been more uneasy about low volatility and high asset values, raising the risk of more damaging market turmoil.

Fed officials also welcome signs inflation is rising toward their 2% target, a level they view as consistent with a healthy, expanding economy.

Prices excluding volatile food and energy categories rose 2.6% in January on a six-month annualized basis, up from a 1.1% gain in July and one of the strongest periods in years, according to the Labor Department’s consumer-price index released this past week. The Fed’s preferred inflation gauge is projected to rise 1.6% in January from a year earlier, according to Morgan Stanley economists.

Top officials are unlikely to change course in response to such figures, just as they didn’t veer from their path last year when inflation was a bit weaker than they expected.

They also don’t yet see signs inflation is headed much above their target.

Complicating Mr. Powell’s job are the recent tax cuts and government spending increases approved by Congress and President Donald Trump, which should boost economic growth at least this year and next.

The $1.5 trillion tax-cut package was slightly larger and more frontloaded than the plan on the table in mid-December when officials made their most recent economic projections. And that was before the deal last week to increase federal spending by $300 billion over the next two years.

Both changes have bolstered the Fed’s projection of stronger growth this year. This could nudge up inflation, though possibly at a slower pace than might have occurred in the past.

The upshot is that for the first time since Fed officials began raising rates in 2015, their discussions this year appear likely to center on whether to move a touch faster than projected versus a touch slower.

For now, that debate doesn’t reflect any broader rethink under way. The Fed is a glacial institution that doesn’t plot rapid changes in course with just a handful of data points.

“I feel strongly and have a lot of conviction the base case should be three moves for this year, and if I’m wrong, it could even potentially be more than that,” said Dallas Fed President Robert Kaplan in an interview last month.

Last week’s spending bill prompted several forecasters, including at Nomura Securities, UBS AG, and Oxford Economics, to revise up their projections of Fed rate increases this year to four, from three, joining others at J.P. Morgan and Goldman Sachs, which have already been predicting four rate increases.

Mr. Powell, the first noneconomist to lead the bank in more than three decades, could face more difficult decisions later this year and next year if wages or prices show signs of breaking much higher or financial bubbles emerge.

In his nearly six years at the central bank, Mr. Powell has established a reputation as a consensus-oriented leader focused on careful analysis, suggesting he isn’t likely to chart a new course without substantial evidence that argues for it.

“We approach every issue through a rigorous evaluation of the facts,” Mr. Powell said this week. That approach also includes listening to “well-informed critics,” he said.

Mr. Kaplan said Fed officials already know Mr. Powell’s leadership. “You can hire an outside CEO and everybody has to adjust,” he said. “If you promote from within…it gives you a person who is ready to lead the organization [on] day one.”

Mr. Powell is contemplating steps to make the organization more transparent to the public and less bureaucratic internally, extending an evolution started by his predecessors.

Mr. Powell has encouraged the Fed’s staff to provide quick and informal analysis, reflecting a more businesslike culture at an institution that has tended to prize rigorous reviews that can take long to gestate.
Source: Dow Jones