With half-point interest-rate increases all but certain in June and July, Federal Reserve officials are shifting the focus away from a destination on hikes to something that’s trickier to determine and explain: the broader impact of their policies on the economy.
At the start of the hiking cycle, Chair Jerome Powell said the goal was “getting rates back up to more neutral levels as quickly as we practicably can.” In May, however, he walked back from the concept of neutral -- a level that neither slows nor speeds up growth -- cautioning that the discussion had a “sort of false precision.”
“You know, you’re going to raise rates, and you’re going to be kind of inquiring how that is affecting the economy through financial conditions,” he said.
Policy makers delivered that message repeatedly last week, in their final comments before the Fed entered its pre-meeting blackout period.
Officials want to cool demand by tightening financial conditions. They don’t know with any precision how raising rates combined with a shrinking balance sheet crimps spending. It’s also hard to explain a financial conditions goal, though there are several indexes that try to boil down an array of market prices into a single gauge.
“We are certainly looking at financial conditions as a key guide as to how much policy tightening is required,” said David Page, head of macroeconomic research at AXA Investment Managers. “But there isn’t a standard metric. The precise balance is much more art than science.”
Powell used the term “financial conditions” more than a dozen times at his post-meeting press conference in May, noting that officials “need to look around and keep going if we don’t see that financial conditions have tightened adequately.”
He clearly wants to signal a goal, but the goal line is hard for officials to define because some markets tighten quickly while others lag.
Thirty-year mortgage rates, for example, rose to a recent high of 5.6%, according to Bankrate.com., about 200 basis points above January. That’s almost $400 in additional monthly payments on a $300,000 loan, and the added cost is slowing home sales.
But for a company financing inventory on 90-day commercial paper at around 1.5% -- when the Fed’s preferred gauge of inflation is running at 6.3% -- conditions might still seem cheap and easy.