MNI Interview: Ex-Fed Blinder Sees Tightening Getting Complex

By Pedro Nicolaci Da Costa

     WASHINGTON (MNI) - The Federal Reserve, after two years of predictably

gradual interest rate increases, is about to enter a period of more delicate and

complex decision-making as it determines how high to push borrowing costs before

taking at least a pause, former Fed vice chair Alan Blinder told MNI in an

interview.

     Blinder, a Princeton University professor, believes the Fed's own forecasts

for ongoing interest rate hikes well into 2020 might be premature given an

economy that, despite a couple of quarters of robust stimulus-led growth, is

still likely to expand fairly modestly in 2019 and 2020.

     Policymakers are weighing a historically low jobless rate and strong

quarterly gross domestic product numbers against still-moderate inflation and

wage gains that suggest the job market could improve even further without

stoking runaway consumer prices.

     Underpinning the debate is the Fed's ever-changing determination of what

the "neutral" rate of interest might be - one that neither stimulates or slows

the economy in a given period.

     This matters for the average worker because it could mean the difference

between a decent but still-shaky job market where employees lack the power to

bargain for higher wages, and one where job opportunities are so ample that

employers are forced to bolster pay even at the lower-end of the income ladder.

     "Monetary policy has lately been pretty easy and pretty boring but it's

about to get less easy and less boring," said Blinder, a Princeton economics

professor. "The reason for this is no one knows where the neutral rate is but we

must be getting in the neighborhood and it becomes important to make a

judgement."

     For now, Blinder said, officials are inclined to keep raising rates once

per quarter, as they have over the last two years. Blinder was talking to MNI

ahead of Friday's payrolls data release which showed a stronger than expected

creation of 250,000 new jobs for October.

     Fed officials will meet on Tuesday and Wednesday and are expected to hold

off on further monetary tightening until December. In the meantime, they are

expected to debate possible changes to the Fed's underlying policy framework -

the manner in which it sets interest rates.

     However, Blinder said that by the time the middle of next year rolls around

and the official interest rate is around 2.5% or higher, the Fed may be having

second thoughts about going any further despite its own more aggressive

forecasts.

     "Then it becomes a serious question - a. whether you want to go further at

all and b. if you decide to go further, then at what pace?" he said. "What kind

of data-dependence should be governing the pace? The key thing they're going to

be focusing on is the inflation rate."

     Blinder said one parameter Fed officials have not officially defined,

perhaps because the committee lacks a consensus on the subject, is how high it

would allow the inflation rate to go before taking it as a sign that further

monetary policy tightening is needed. 

     US inflation fell short of the Fed's 2% target for much of the economic

recovery from the Great Recession, signaling anemic activity, but has recently

been hitting the target.

     Determining that boundary may be the next frontier in the progression of

the Fed's effort to sharpen its public communications, Blinder said.

     The Fed has raised rates several times starting in December of 2015 to a

range of 2% to 2.25%. It has also begun reducing its balance sheet, expanded

sharply in response to the Great Recession and financial crisis.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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