Tags: dropping | accommodative | fed | signal

Why Dropping 'Accommodative' May Not Signal Much From Fed

United States Federal Reserve System symbol as printed on a US currency bill
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Wednesday, 26 September 2018 02:39 PM

Federal Reserve officials on Wednesday dropped their long-standing description of the central bank’s monetary policy as “accommodative.”

Here’s some context to help interpret what it may mean for the Fed’s rate outlook.

Calling interest rates accommodative means policy is adding fuel to the economy. As they rise, they’ll eventually hit a neutral level where they aren’t pressing the accelerator or the brakes. Dropping “accommodative” simply acknowledges rates are moving closer to that level.

That might be construed as a dovish signal that the Fed is nearing the end of its hiking cycle, or is at least closing in on a pause. But such a conclusion ignores other factors.

For starters, policy makers don’t agree on where the neutral level actually sits.

Estimates within the Federal Open Market Committee released Wednesday ranged from 2.5 percent to 3.5 percent. On top of that, even if officials agreed on its location, they’ve haven’t come to any consensus on whether they should stop at neutral or press on into restrictive territory. So dropping the word “accommodative” sooner rather than later doesn’t necessarily telegraph near-term rate intentions.

Then there’s the dot-plot of Fed rate forecasts. Those remain unchanged today in calling for another hike in December and three more next year. That means officials are explicitly communicating that no policy shift is on the horizon.

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Federal Reserve officials on Wednesday dropped their long-standing description of the central bank's monetary policy as "accommodative."
dropping, accommodative, fed, signal
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2018-39-26
Wednesday, 26 September 2018 02:39 PM
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