MNI INTERVIEW: Fed Nears Dropping "Gradual Increases" Guidance

--Change Would Be Tied To Increased Data Dependence

--Would Not Necessarily Mean Rate Increases No Longer Possible

By Jean Yung

     WASHINGTON (MNI) - There is broad support within the Federal Reserve to

scrap forward guidance in its policy statement calling for further increases in

interest rates, as it leaves behind crisis-era tools in favour of a more

flexible, data-dependent approach, senior economists at the Richmond Fed told

MNI in an interview.

     They stressed that if the Fed does decide to drop a reference to "further

gradual increases" in the fed funds rate being consistent with its economic

objectives, it would not be a signal to investors that no more interest rate

rises were coming.

     In its December meeting, several FOMC officials "expressed the view that it

might be appropriate over upcoming meetings to remove forward guidance entirely

and replace it with language emphasizing the data-dependent nature of policy

decisions," minutes showed.

     Forward guidance "made sense" in the post-crisis era, which saw the

deployment of various unconventional policy tools, the Richmond Fed's senior

policy adviser John Weinberg said, in an interview last week before the blackout

period for Fed officials ahead of the FOMC's Jan. 29-30 meeting. "Past behavior

wasn't such a useful guide for future policy in an abnormal situation."

     Now that the Fed is getting to a more normal stance, "the way in which

committee reacts to incoming data will again be more normal, so that kind of

forward guidance might not be necessary," he said.

     --DATA-DEPENDENT

     Three years into the current tightening cycle, U.S. monetary conditions are

finally returning to more neutral levels, even as the Fed has indicated a pause

in its rate hike cycle. Last summer, the FOMC removed a phrase saying policy

will stay accommodative "for some time" and, in December, sought to inject more

uncertainty into forward guidance by using the word "judges" instead of

"expects" to describe their gradual hiking plan.

     Abandoning forward guidance entirely in favor of explanations of how the

Fed might respond to economic developments would be the last step in a switch to

a data-dependent regime.

     "The more statements reflect qualifiers and add-ons the less credible it is

as a statement that says we've reentered normal times," said Richmond Fed

research director Kartik Athreya.

     That is not to say higher rates aren't still on the horizon. Most Fed

officials in December penciled in one to three rate hikes this year if data

comes in as expected, though they are also calling for a patient, wait-and-see

stance with investors focused on risks of a slowdown in China's economy, a

prolonged partial U.S. government shutdown and ongoing trade uncertainty.

     "You've seen a systematic paring back of the length of the statement

itself, so there's a sense there that we don't need to go on and on to convey

what's going on," Athreya said.

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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