Federal Reserve Chair Powell Cautious on Long-Term Outlook Despite Interest Rate Hike

Federal Reserve officials raised the long-term target interest rate on March 20th (local time). However, Jerome Powell stated that this does not necessarily signal a continuous rate increase.

The current target rate is between 5.25% and 5.50%, with a forecasted rate cut of 0.75% this year. The administrators have raised the long-term forecast for the federal funds rate from 2.5% to 2.6%, exceeding most estimates over the past five years.

Policymakers’ long-term estimates have consistently decreased over the years preceding the pandemic, evidencing very low interest rates and persistently weak inflation.

However, this view has been changing for at least the past year. According to new forecasts released on Wednesday, seven policymakers currently say the long-term neutral rate is at least 2.9%, up from only three a year ago.

In a press conference after the interest rate meeting, Powell stated, “While I don’t expect us to return to very low rates, I can’t yet be sure that a new high-interest-rate regime will emerge.”

He also said, “The rates before the spring 2020 coronavirus pandemic won’t drop back to very low levels,” but added, “There is a great deal of uncertainty about where long-term rates will ultimately stand.”

In recent months, there has been a lively debate between the Fed and private-sector economists about whether the era before the spread of ultra-low interest rates worked adequately.

Some argue that in the face of changes in the economy and government finances that point to continuously more expensive credit, the era of very low borrowing costs is unlikely to return.

The shift to higher long-term forecasts was not unexpected. Joe Brusuelas, chief economist at research firm RSM US LLP, said the Fed’s forecast points to an inflation-adjusted neutral rate of 0.4%, which matches the December outlook.

However, the forecast change was significant for Tani Fukui, the global economy and market strategy head at MetLife Investment Management.

She said, “One of the discussions is that they are not as tight as they thought, which could explain why the economy has not slowed as much as expected despite aggressive rate hikes.”

She added, “The change in forecasts means they do not need to give up much to reach a dovish stance.”