“In a pure machine economy, where machines don’t read into actions, you would ease” and “kind of micro-adjust” if inflation fell well shy of target, said Gennadiy Goldberg, a rates strategist at TD Securities in New York. “Since the Fed is subject to rate-hike cycles, easing is a very high bar.”
So far, the Fed is answering low-inflation risks with patience.
Powell noted in a March 8 speech at Stanford University that core inflation was coming in close to goal, but “despite this favorable picture, we have seen some cross-currents in recent months.”
“With nothing in the outlook demanding an immediate policy response and particularly given muted inflation pressures, the Committee has adopted a patient, wait-and-see approach to considering any alteration in the stance of policy,” he said.
If economic data overall should weaken sharply, the answer is simpler: cut rates. Markets are already pricing in future easing as growth shows cracks around the edges, with both industrial production and Empire manufacturing figures coming in weak last week.
“The Fed is always going to try to sound optimistic until it’s very clear that things are turning worse,” said Julia Coronado, founder of MacroPolicy Perspectives LLC in New York. “I don’t think the bar is that high for a cut, but the threshold is: does the economy weaken.”
Coronado said she’d expect the Fed to act if payrolls slowed notably and growth fell below trend, which has been around 2 percent, in a way that looks likely to be sustained.
“If you see that, you want to get ahead of it,” Coronado said. “You don’t want to roll the dice and gamble when you see a domestic slowdown taking hold.”
What Bloomberg’s Economists Say
“While recent economic news has not been particularly upbeat, policy makers will aim to stress "patience" and not sound overly pessimistic in their assessment. Regardless of whether or not the Fed resumes interest rate increases later this year, the tone of the economic data is not yet providing policy makers a window to start shifting their communications.”