With the economy shrinking in the first quarter and interrupting the Federal Reserve’s plans for tightening monetary policy, analysts now expect the central bank will only “crawl” when it comes time to raising interest rates.
“The new buzzword at the Fed seems to be no longer ‘liftoff,’ but ‘crawl,'” Ethan Harris, co-head of Global Economics Research at BofA Merrill Lynch Global Research, said Tuesday.
Harris’ remarks come after several Federal Reserve officials earlier in the week tried to downplay the prospects for quick U.S. growth in 2016 and for the possibility that the central bank would raise rates quickly.
In particular, Federal Reserve Board Vice Chairman Stanley Fischer said Monday that the Fed did not plan to raise short-term rates from zero, where they’ve been since 2008, straight up. “We’re going up with the interest rate, then along, and then another little jump,” Fischer said at an International Monetary Fund event in Toronto. “That’s not liftoff, that’s crawling.”
Fischer’s comment was meant to illustrate that the pace of rate increases could be as important in loosening monetary policy as the initial rate hike. The timing of the first increase has been a major question facing investors for months.
“This is the message that they’ve been giving for some time now,” said Peter Hooper, chief economist at Deutsche Bank. “The slow rate of ascent that they’re expecting is far more important than the date that they start it.”
Fischer “made that comment about crawl basically to strengthen the message that Janet Yellen is trying to give,” Hooper said, referring to the Fed’s chairwoman.
In its recent monetary policy statements, the Fed has said that it will keep its interest rate target near zero until there is evidence that employment is still growing and inflation is heading up to the Fed’s 2 percent target.
Yellen has stood by the assessment that those conditions will be met this year, despite the 0.7 percent contraction in annualized gross domestic product in the first quarter.
“I think it will be appropriate at some point this year to take the initial step to raise” interest rates, Yellen said in Providence, R.I., in late May.
After the first increase, she said, “The pace of normalization is likely to be gradual.”
By promising to raise rates slowly, the Fed is effectively promising easier money for longer. The short-term interest rate targeted by the Fed influences interest rates throughout the economy, including on mortgages and credit cards.
In recent months, Fed officials have indicated that slower rate increases, rather than a much later first rate hike, will be how they respond to disappointing economic data.
That message has become more relevant as some members of the central bank have suggested that the weak first-quarter growth might reflect larger problems with the economy, rather than a blip attributable to unusually harsh winter weather or other transitory factors, as some have suggested.
On Monday, Federal Reserve Bank of Boston President Eric Rosengren suggested that the economy might not return to faster growth in 2015.
On Tuesday, Fed Governor Lael Brainard echoed that assessment, citing the lack of evidence of a “bounce-back” in economic data for the second quarter.
Most investors expect the Fed to raise rates for the first time in late 2015 or early 2016.
Harris said Tuesday that the Fed would likely move in September. “The Fed needs to be concerned this is a temporary slowdown, this is an aberration,” he said, predicting that economic statistics would show enough improvement for the Fed’s purposes by the fall.
