File photo Photograph:( Reuters )
Since introducing that idea in October as he called a halt to last year's mini-rate cut cycle, Powell himself has uttered the term at least half a dozen times, and the phrase has peppered remarks from other policymakers as well
At a glance, the Federal Reserve has set a high bar for any change in interest rates this year: A "material reassessment" of the economic outlook would be required as set forth by the US central bank chief Jerome Powell.
Since introducing that idea in October as he called a halt to last year's mini-rate cut cycle, Powell himself has uttered the term at least half a dozen times, and the phrase has peppered remarks from other policymakers as well.
But a closer listen reveals significant distinctions among the Fed's 17 policymakers as to what "material reassessment" means. And that may complicate efforts to understand what might prompt the next rate move as economic data spool out during the US presidential election campaign this year.
Obvious shocks will matter, and the sharp shift in markets following a coronavirus outbreak in China shows just how fast unexpected events can start to reshape the outlook. Major stock indexes were down sharply on Monday, oil prices and the US dollar rose, and economic analysts saw a potential hit to Chinese and possibly global economic growth as the death toll from the virus rose and a major Chinese city was quarantined.
Carefully watched bond spreads narrowed, and investors started pushing forward their estimates of a Fed rate move, with now roughly even odds the central bank will cut rates again by the end of June.
What will convince individual policymakers, however, varies widely.
Will consumer behavior be the obvious tell, as Atlanta Fed President Raphael Bostic thinks? That would leave rates on hold as long as people keep spending.
Or, as Minneapolis Fed President Neel Kashkari contends, would the failure of wages to grow faster be a sign the economy is weakening and be enough on its own to warrant more rate cuts?
What if inflation remains stuck below the Fed's 2 per cent target? Would that warrant a rate cut in hopes of lifting it? St. Louis Fed President James Bullard suggests so, calling it the Fed's "unifying theme ... That (inflation) has got to get better."
Not so fast, says Cleveland Fed President Loretta Mester. "I would not at this point want to take deliberate action just to try to get inflation back up," she said in a recent interview.
Mester is concerned last year's three rate cuts could encourage excessive risk-taking by households, companies, and investors taking advantage of cheap credit. On the other hand, a "deterioration" of public attitudes about inflation might change her mind.
Fed officials will continue their debate when they gather on Tuesday for the first policy meeting of the year. Financial markets do not expect the Fed to change its benchmark overnight lending rate at the end of the meeting on Wednesday.
Economic data since the Fed's last meeting in December have, if anything, enforced the central bank's consensus view of an economy that will keep motoring along, though some of the numbers have been uneven. December jobs and retail spending were healthy, for example, but the outlook from factory purchasing managers was sour for a fifth straight month. Growth overall is expected to be around 2 per cent for the year.
As Mester notes, it adds to the dilemma of sorting out just what could change the Fed's current "wait-and-see" approach.
"I do think our communications could be crisper," she said earlier this month in reference to what "material reassessment" means. "We use words like that, and they are open to interpretation."
That may have been the point.
Both "material reassessment" and the need for "persistent" higher inflation were introduced as rate change benchmarks through a less formal channel. Rather than appearing in the Fed's official statement after each policy meeting, they came from Powell himself in press conferences in October and December.
His comments left open just what could prompt a move lower, and just how high or "persistent" inflation would need to be for the Fed to lean against it with higher rates.
Minutes of the October policy meeting, as well as recent interviews with policymakers, indicate the aim of the new language was to keep a high bar for further moves while also letting each official see it as consistent with their view of what is needed to move again in either direction.
So where Mester remains focused on financial stability as a reason not to cut rates, Bullard suggests a quicker trigger if prices remain stuck because "you have to take some risk" with a higher pace of inflation to convince the public the Fed's target is meaningful.
The Fed has run into problems before when it tried to resolve background disagreements with public remarks outside the official statement.
In preparing to slow its bond purchases in 2013, policymakers left much of the explaining to then-Fed Chair Ben Bernanke. That ended with a broad sell-off in global bond markets, known as the "taper tantrum," when the Fed's plans came off as more aggressive than intended.
That lesson learned, when the Fed changed its language in late 2014 to indicate officials would be "patient" in deciding when to raise rates for the first time since the financial crisis, they agreed the word should be explicitly defined by Bernanke's successor, Janet Yellen, in her press conference. She clarified it meant at least a two-meeting wait.
Minutes of the October meeting, when the Fed cut rates for the third and, for now, final time, suggest the phrase "material reassessment" served this time as a sort of handy catch-all. "Most participants" agreed it would describe their sensitivity to upcoming events after that final rate cut, even if they emphasized different things.
It wasn't unanimous. "A couple" of policymakers on the rate-setting Federal Open Market Committee wanted more explicit language to say no further cuts were coming unless economic data was "consistent with a significant slowdown."
But it did offer flexibility for a policymaking body that may have reached a common landing spot for now. No one is openly arguing for a change in rates anytime soon, though they have different ideas about where to go next.
"It is big-tent language," Bullard said. "It matters that it is not in the statement. The committee did not have to come to a decision to put it in. That probably does mean that different people will have different interpretations."