Dropping what had been explicit guidance about the likelihood of rate cuts this year, Jerome Powell and other Fed officials are instead focusing on broadly different near-term paths the economy might follow
Federal Reserve Chair Jerome Powell said in a May 1 news conference he didn’t want to talk about economic “hypotheticals,” but that’s what he and other U.S. central bank officials have shifted toward in discussing monetary policy that has hit an uncertain juncture in the effort to tame inflation.
But Powell’s elaboration in his post-meeting May 1 news conference about different paths the economy might follow “caught my attention,” Bomfim said. “Scenario analysis becomes important to handle those situations where you’re especially uncertain about what’s coming next.” If the Fed’s baseline is for a continued drop in inflation and eventual rate cuts, alternatives include U.S. joblessness starting to rise and cuts coming fast; inflation taking a long time to decline and cuts being delayed; inflation unexpectedly accelerating and rate hikes becoming warranted; and, perhaps the trickiest case, inflation sticking at the current level.
The “dot plot” of policy rate projections in particular has been both leaned on by Fed chiefs when it is seen helping anchor public perceptions, and declared a distraction when it is taken as something close to a promise at times when officials don’t want to offer concrete guidance. Fed projections also include data showing the extent of doubt around the outlook. In March, for example, the median projection saw the personal consumption expenditures price index – the central bank’s preferred inflation gauge – ending 2024 at 2.4 per cent, approaching the 2 per cent target. But officials also saw a 70 per cent probability it could actually be as low as 1 per cent or as high as 3.8 per cent – outcomes that would inspire dramatically different policy decisions.
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