Ebbing global growth and shaky financial markets threw the U.S. Federal Reserve off course in early 2016, and it took nearly a year for officials to regain confidence growth would continue and convince investors they would again raise interest rates.
Similar conditions confront Fed policymakers as they meet this week, with market skepticism about further rate hikes as deep as it was three years ago, and a stalemate over global trade, a U.S. federal government shutdown, and waning business and consumer confidence further clouding the picture.
Policymakers have been clear they plan a “patient” pause in rate hikes. The challenge for Fed chairman Jerome Powell is how much of a pause to signal without leaving the public convinced that the Fed’s current cycle of rising interest rates has come to a full stop.
But policymakers are now in no rush, with some framing the likely pause in terms of “months” that may be needed for risks to subside enough for them to approve the next of two rates hikes expected for the year.
Even that may be optimistic. While economists polled by Reuters this month see those hikes delayed by a quarter compared with a December survey, financial markets do not price in any rate increases in 2019.
“The essential debate...is whether the FOMC would still prefer to signal to the market that the next change in interest rates is likely higher or whether it should emphasize patience and remove rate guidance altogether,” Barclays economist Michael Gapen wrote. The latter, he said, may calm markets today, but set the stage “for undesirable volatility later” if the Fed does need to hike again.
