Fed’s new direction may mean low rates for a long time
The Federal Reserve has already given enough guidance about the likely path of interest rates at this juncture and doesn’t need to offer more, Dallas Fed President Robert Kaplan said.
“I would prefer to wait,” Kaplan said Friday during a Bloomberg Television interview with Michael McKee. “I would prefer to get more clarity on the path of the virus. I think we’ve already given quite a bit of forward guidance.”
The Fed’s quarterly projections, which will be updated at the central bank’s upcoming Sept. 15-16 policy meeting, “have already said that rates are going to stay low for the rest of this year and all of next year, and I would prefer to show some restraint here,” Kaplan said.
Kaplan’s comments follow the Fed’s announcement Thursday that it had updated its policy strategy for achieving its employment and inflation goals. Fed officials say they are now trying to keep inflation near 2 per cent on average over time, which means they will likely seek to run inflation above target following periods of below-target inflation.
When the central bank’s policy-setting committee cut its benchmark rate to nearly zero at the onset of the pandemic in March, it said it wouldn’t begin raising rates until the economy was “on track” to achieve the Fed’s goals.
Minutes of their last policy meeting in July showed that a number of Fed officials thought “providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point.” Central bankers see that as a potential way to foster favorable borrowing conditions by anchoring longer-term interest rates at low levels.
“There’s more pain out there that we’re going to have to support the economy through,” Cleveland Fed President Loretta Mester said Friday on CNBC.
“What that looks like, we’re going to have to take our time to evaluate that,” she said. “But I think accommodative monetary policy is going to be very important throughout this recovery.”
Kaplan said the Fed’s new approach toward its inflation goal could eventually help more minorities find jobs in the future, though he cautioned there were limits to how much above-target inflation it could tolerate.
”On the margin, I’m willing to take a little bit more risk in service of getting underrepresented groups into the labor force -- a little bit more risk on inflation -- but I am not for one going to be willing to take risk that we’ll lose price stability a la the ‘60s and ‘70s,” the Dallas Fed chief said. “I’m going to be on guard against that.”
Philadelphia Fed President Patrick Harker, also speaking Friday on CNBC, said his willingness to let inflation run above the target in the future would depend on the trajectory of price pressures at the time.
“It’s really about the velocity of inflation, not just the overall level,” he said.