As Federal Reserve Chairman Jerome Powell and his colleagues gather this week for a policy making meeting, some of them will likely have 1995 on their mind.
That was the year that the Fed initiated a mid-course correction in monetary policy, cutting interest rates after a sustained bout of tightening. Now some officials and investors are beginning to wonder if the Fed will again have to ease its stance after raising rates four times in 2018.
“I do see some parallels between the 1995-96 period and what we’re currently in,’’ said David Stockton, who was at the Fed at the time and is now with the Peterson Institute for International Economics. “There’s always some concern that maybe you’ve overdone it’’ after repeatedly raising rates.
Powell and his colleagues are widely expected to hold rates steady at their April 30-May 1 meeting. What Fed watchers will be looking for are any hints in the post-meeting statement -- or more likely, Powell’s subsequent press conference -- that the central bank is teeing up a rate cut for later in the year.
“I think they stay on hold here for a long time, but there is a risk that lower inflation does push them to think about easing,’’ said Bruce Kasman, chief economist for JPMorgan Chase & Co. in New York.
Fed Vice Chairman Richard Clarida has pointed to 1995 and 1998 as two instances where the central bank reduced rates as insurance against a weakening of the economy, even though it didn’t see a recession lurking.
Some Fed watchers think 1995 is the better template for what’s happening now.
In 1998, the central bank cut rates three times in rapid-fire succession to short-circuit a financial crisis brought on by the Russian debt default and the near collapse of hedge fund Long Term Capital Management. There’s no such triggering event today.
In contrast, there’s a number of parallels between now and 1995-1996. The Fed justified its three rate reductions back then -- in July and December 1995 and January 1996 -- by pointing to moderating price pressures.
Policy makers today are even more fixated on the low level of inflation -- and have made no secret of their desire to see it higher.