Federal Reserve Chairman Jerome Powell and his colleagues have made an important shift in their strategy for dealing with inflation in a prelude to what could be a more radical change next year.
The central bank has backed off the interest-rate hikes it had been delivering to avoid a potentially dangerous rise in inflation that economic theory says could result from the hot jobs market. Instead, Powell & Co. have put policy on hold until sub-par inflation rises convincingly.
“The Fed is evolving to a ‘whites-of-the-eyes’ approach in terms of inflation’’ under which it won’t hike rates until price rises accelerate, said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC.
Powell and some of his colleagues have been perplexed and perturbed by the Fed’s failure to convincingly raise inflation to its 2 percent target. That’s what’s driving his seeming adoption of a show-me strategy on price pressures.
As the Fed embarks on a year-long review of its monetary policy framework, Powell’s also shown willingness to seriously consider an approach under which the central bank would seek price rises above its objective for a while.
Powell’s change in tactics has potentially major ramifications for monetary policy, the economy and financial markets.
Chicago Fed President Charles Evans said this week that the central bank may hold policy steady until the fall of 2020 and might even reduce rates in the unlikely event that underlying inflation softened.
Such a stance could eventually lead to faster price rises, lower unemployment and a longer expansion as officials refrain from raising rates to rein in the economy.
“Monetary policy has the luxury to be able to accommodate growth rather than having to slow down growth because of inflation,’’ said Angel Ubide, head of economic research for global fixed income at hedge fund Citadel. He expects the expansion to continue for several more years.
That would seem to be good news for President Donald Trump, who is up for re-election in 2020. But he’s not satisfied. He’s pressing the Fed to cut rates and resume bond purchases to turn the economy into a “rocket ship.’’