Why the Federal Reserve Won’t Commit

Mark Carney, the former Bank of England governor, was once labeled the United Kingdom’s “unreliable boyfriend” because his institution had left markets confused about its intentions. Jerome H. Powell’s Federal Reserve circa 2023 could be accused of a related rap: fear of commitment.

Mr. Powell’s Fed is in the process of raising interest rates to slow the economy and bring rapid inflation under control, and investors and households alike are trying to guess what the central bank will do in the months ahead, during a confusing economic moment. Growth, which was moderating, has recently shown signs of strength.

Mr. Powell and his colleagues have been fuzzy about how they will respond. The Fed chair signaled during congressional testimony on Tuesday that the central bank could again speed up interest rate increases, but he said that decision would depend on incoming economic data. He suggested that rates were likely to climb higher than previously expected, without clarifying exactly how high. And he reiterated that rates would need to stay elevated for some time, but remained ambiguous about how long was likely to be long enough.

As with anyone who’s reluctant to define the relationship, there is a method to the Fed’s wily ways. At a vastly uncertain moment in the American economy, central bankers want to keep their options open.

Fed officials got burned in 2021. They communicated firm plans to leave interest rates low to bolster the economy for a long time, only to have the world change with the onset of rapid and wholly unexpected inflation. Policymakers couldn’t rapidly reverse course without causing upheaval — breakups take time, in monetary policy as in life. Thanks to the delay, the Fed spent 2022 racing to catch up with its new reality.

This year, policymakers are retaining room to maneuver. That has become especially important in recent weeks, as strong consumer spending and inflation data have surprised economists and created a big, unanswered question: Is the pickup a blip being caused by unusually mild winter weather that has encouraged activities like shopping and construction, or is the economy reaccelerating in a way that will force the Fed to react?

“We’re looking at a reversal, really, of what we thought we were seeing — to some extent — a partial reversal,” Mr. Powell told the Senate Banking Committee on Tuesday.

Mr. Powell used the appearance to suggest that the Fed was going to need to be more aggressive in fighting inflation in light of recent economic readings.

“Nothing about the data suggests to me that we’ve tightened too much,” he said. “Indeed, it suggests that we still have work to do.”

But Fed officials are not only facing an unusually uncertain economic moment — they are waiting on a few major data releases in coming days, including an employment report on Friday and inflation data next Tuesday.

Given that, Mr. Powell stuck to a relatively open-ended script before the Senate committee, saying policy will be made on a “meeting by meeting” basis.

Policymakers had recently slowed their rate increases, making a quarter-point move in February after months of larger adjustments.

But Mr. Powell said Tuesday that “if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

And while he said rates would probably need to rise higher in light of recent economic data, he did not lay out any sense of the magnitude. He simply noted that officials previously expected rates to peak at 5 to 5.5 percent this year, and that the estimate was likely to rise in fresh projections due this month.

Policymakers have raised rates aggressively over the past year, to above 4.5 percent from near zero. Fed officials thought that lifting rates so high would slow growth — and that they would soon be able to stop increasing borrowing costs. In December, central bankers projected that rates would peak in a range of 5 to 5.25 percent.

A cool-down did seem to be taking hold toward the end of 2022. Inflation was slowing with each passing month, consumers were pulling back, and hiring had moderated gradually but notably.

But the start of 2023 threw a wrench in the narrative. Employers added more than half a million workers in January, inflation has shown signs of firming, and consumer spending has come in strong across an array of measures.

That has raised a question: Is the Fed’s policy rate high enough to meaningfully restrain an economy with this much momentum? And it has left central bankers watching carefully to see whether the strength will reverse.

“It’s hard to talk about policy as restrictive — or sufficiently restrictive — when the forward momentum in the economy is so strong,” said Neil Dutta, an economist at Renaissance Macro. “And, more important, inflation hasn’t been resolved at all.”

It has left the Fed in a fully data-dependent mode.

Data dependence is a common central bank practice in fraught economic times: Officials move carefully, meeting by meeting, to avoid making a mistake, like raising rates more than is necessary and precipitating a painful recession. It’s the approach the Bank of England was embracing in 2014 when a member of Parliament likened it to a fickle date, “one day hot, one day cold.”

But such an iterative approach tends to leave investors guessing at what might come next. Wall Street bets range widely on where the Fed’s main interest rate will be at the end of the year. Investors are penciling in anything from 4.5 percent to above 6.25 percent.

Economists at Goldman Sachs wrote in a note this week that if consumption continued to pick up, rates might need to rise to a range of 5.75 percent to 6 percent in order to slow the economy enough to bring inflation under control.

“I think there has been a resounding message from activity, labor and inflation data that made the U.S. economy look stronger than it did last year,” said Blerina Uruci, chief U.S. economist at T. Rowe Price, explaining that the recent surprises likely make the Fed more eager to keep its options open. “They don’t want to take the risk of getting stuck behind the curve.”

Central bankers have time to stay vague about what they themselves anticipate ahead of their meeting on March 21 and 22, and good reason to do so, given the fresh data they will receive this week and next.

Those could shift the economic narrative somewhat.

“I would be very pleased if the data we receive on inflation and the labor market this month show signs of moderation,” Christopher Waller, a Fed governor, said in a recent speech, adding that he was looking for signs that the latest figures “were just a bump in the road.”

But the Fed’s window to watch, wait and retain wiggle room is narrowing. Policymakers are scheduled to put out a fresh set of quarterly economic projections alongside their rate decision on March 22.

Those will show how high they expect interest rates to move in 2023 — illustrating clearly how much more they expect to raise borrowing costs this year.

In short, the Fed might be playing at least somewhat coy for now, but the time to commit is coming.

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