Federal Reserve officials on Wednesday nudged up the level estimated for their target interest rate over the longer term, but central bank Chair Jerome Powell said that does not necessarily herald an era of consistently higher interest rates.
Policymakers' longer-run estimate had fallen persistently over the years prior to the pandemic in what proved to be an extended stretch of very low interest rates and persistently weak inflation.
But gradually, at least over the last year, views have been shifting. Seven policymakers now figure the long-run neutral rate is at least 2.9%, new projections released on Wednesday showed, versus just three a year ago.
Powell, at a press conference after the rate meeting, said that while he does not anticipate a return to very low rates he was not yet sure that a new higher-rate regime was in the offing.
“My instinct would be that rates will not go back down to the very low levels” that prevailed before the onset of the coronavirus pandemic in the spring of 2020, Powell said. But there’s “tremendous uncertainty” about where the longer-term rate will ultimately stand.
Over recent months, in the Fed and among private sector economists, there’s been an active debate over whether the pre-pandemic era of very low rates has run its course. Some believe that period's stretch of very affordable borrowing costs will not return again amid changes in the economy and government finance that point to persistently more expensive credit.
The shift to a higher longer-run forecast was not unexpected. Joe Brusuelas, chief economist of research firm RSM US LLP, said Fed forecasts point to an inflation-adjusted neutral rate of 0.4%, which he said was in-line with the December forecast outlook.
But for Tani Fukui, director for global economic and market strategy at MetLife Investment Management, the change in the forecast was quite important.
"One of the implications is they are not as tight as they think they are," she said, which might explain why the economy has not slowed as much as expected in the face of aggressive rate rises. She added the shift in forecast also means “they don't have to cut as much to get to an easing position.”
Meanwhile, ING Chief International Economist James Knightley said in a note he sees that forecast climbing eventually to 3% due in large part to loose fiscal policy.
