The Economy

Fed Looks Toward End of Years of Stimulus

It may soon be time to drop language indicating monetary policy “remains accommodative,” Fed officials suggested at their June meeting.
Matthew HellerJuly 6, 2018
Fed Looks Toward End of Years of Stimulus

The Federal Reserve could raise interest rates over the next year to a level that would no longer be “accommodative” of economic growth.

According to the minutes of the Fed’s last policy meeting in June, many participants noted that if gradual increases in the target range for the federal funds rate continued, the federal funds rate could be at or above the 2.9% neutral level sometime next year.

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The Fed’s latest projections put the benchmark rate at 3.1% by the end of 2019, rising to 3.4% by the end of 2020.

Because of this expected trajectory, a number of officials suggested at the meeting that it might soon be appropriate to drop the language in the policy statement indicating that the stance of monetary policy “remains accommodative.”

As The Wall Street Journal reports, “Fed officials have now spent several meetings discussing the prospect of monetary policy moving from stimulating growth to possibly restricting it.” At the June meeting, they voted to raise the benchmark rate for a second time this year to a new range of 1.75% to 2%.

“They see moderate, gradual increases of interest rates, so ‘steady as she goes’ is the name of the game,” Putri Pascaualy, a senior credit strategist at Pacific Alternative Asset Management, said in a client note.

The current stance of the Fed’s monetary policy reflects its confidence in the strength of the U.S. economy and its belief that inflation is on course to rise above 2% on a sustained basis.

Officials “judged that continuing along a path of gradual policy firming would balance the risk of moving too quickly, which could leave inflation short of a sustained return to the [policy-making] committee’s symmetric goal, against the risk of moving too slowly, which could lead to a buildup of inflation pressures or material financial imbalances,” the minutes said.

“These minutes don’t give the impression that a clear majority is ready now to abandon the idea that the risks are ‘roughly balanced’ or that ‘gradual’ rate hikes are no longer enough,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

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