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Clues to Future Federal-Funds-Rate Policy

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federal-reserve-puzzleBecause the Federal Reserve is not likely to change its federal-funds-rate target anytime soon, the most interesting thing about next week's Fed meeting may be any indication of when or whether the Fed anticipates changing its course. That's because the announcement following the upcoming meeting will include an update of economic projections from the Federal Open Market Committee (FOMC), which can provide an early clue to the future direction of interest rates.

FOMC projections and Fed interest rates

Toward the end of each calendar quarter, the Fed releases a series of economic projections indicating the consensus of the FOMC as to where key economic indicators will be at the end of the year, and at the end of the next two years. These projections also indicate what the FOMC expects will be the long-run normal for these indicators.

Given that the Fed's mandate is to balance monetary policy between promoting economic growth and controlling inflation, it is not surprising that the FOMC's economic projections focus on growth and inflation indicators. And, as a bottom line to it all, those projections also include where the FOMC sees the federal funds rate going.

>> How accurate are the Fed's projections? Read Reality Check: Evaluating the Federal Reserve Board

No dramatic developments

As it stands now, the FOMC's projections do not indicate any particularly dramatic developments. They depict a slight slowing of growth over the next couple years with a moderate uptick in unemployment. They also depict a very slight rise in the inflation rate.

Neither the projected change in growth nor inflation is strong enough to drive interest-rate policy on its own and, given that slowing growth and rising inflation would indicate opposite rate adjustments, the current projections seem to indicate a certain equilibrium for fed interest rates. The only noteworthy feature is that, despite that equilibrium, the Fed does anticipate mild rate increases in future years. This is a reminder that current federal-fund-rate targets are well below historical norms.

The updated projections will indicate whether the Fed sees anything upsetting the current equilibrium, which may depend on how it digests recent economic developments.

How recent developments may affect Fed interest rates

June began with a disappointing employment report. Job growth for May was just 75,000, and there were significant downward revisions to the estimates for the prior two months. While month-to-month-job-growth reports can be wildly inconsistent, what is more significant is the drop-off in job growth in 2019 compared to last year. Over the first five months of 2019, job growth has averaged 164,000 per month compared with 223,000 per month through all of 2018.

On the inflation front, the Bureau of Labor Statistics reported a slight respite for the Consumer Price Index (CPI) on June 12. The Fed prefers to use the Personal Consumption Expenditures Price Index from the Bureau of Economic Analysis as its inflation indicator; but since this is only updated quarterly, the CPI is the most recent barometer of inflation conditions.

The CPI increased at an annual pace of just under 1 percent in May, its slowest monthly increase since January. While the CPI has risen at a 2.33 percent annual pace so far in 2019, slightly ahead of the Fed's 2.0 percent target, a slowing of this trend would ease pressure to raise rates.

No pressure to normalize rates

With no immediately compelling impetus to raise rates, the remaining reason for doing so is that, with rates well below historical norms, the Fed may be ill-equipped to deal with the next recession. However, this puts raising rates on par with cleaning out one's garage or making an appointment for the dentist - you know it needs to be done, but it's still easy to put off for the time being.

A slowing of job growth and an easing of inflation give the Fed every reason to put off the chore of raising rates at this point. The updated economic projections to be released next week could provide a clue as to how long the Fed anticipates it will continue to put off raising the federal funds rate in the months ahead.


More resources for journalists and consumers:

Low Fed Funds Rates Cost Consumers Over $1.5 Trillion

Rising Interest Rates: Consumers Face Unprecedented Risk

The Truth About Investment Risk

What inflation is doing to your CD rates

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Previous Federal Reserve Board Updates articles:

FOMC Date2019 FOMC Meeting Update Articles
5/2/2019Federal Reserve Pursues Rate Stability
3/21/2019Shifting Stance: Fed Implies No Rate Increases in 2019
1/31/2019Fed's Low Profile Won't Stop Interest Rates from Rising

FOMC Date2018 FOMC Meeting Update Articles
12/21/2018Expect more stable Fed rates in 2019 after latest hike
11/11/2018Look for bank rates to move even as Fed stands pat
9/26/2018September 2018: Rate hike may hurt more than help consumers
8/1/2018Banks aren't waiting for Fed rate increases
6/13/2018Your strategy when the federal funds rate rises
5/2/2018Interest rates surge despite Fed's inaction
3/21/2018Fed rate increases not helping consumers
1/31/20183 ways to profit when market rates outpace the Fed

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