(Bloomberg Opinion) -- So far, so good. The Federal Reserve’s efforts to engineer a soft landing for the economy are going well. Last week’s 50-basis-point cut in the central bank’s policy rate looked right, given recent signs of cooling in the labor market and the further gentle decline in inflation.
What matters now is that the Fed should stay open-minded about future policy. That’s a challenge, partly because of the way the Fed explains itself.
Investors rightly saw a small change in rates as not that significant in itself. More important was the implicit message about the central bank’s intentions. The Fed’s cut — to a range of 4.75% to 5%, down from 5.25% to 5.5% — was greeted not as a one-off action but as a decisive “pivot” from restrictive monetary policy (with the focus on controlling inflation) to a phase of further cuts (with attention shifted to avoiding unemployment).
This interpretation makes the Fed’s job harder. The rate reduction might’ve happened earlier if the central bank hadn’t feared committing itself too soon to an extended series of cuts. Looking ahead, it might cut more than conditions demand, or choose not to push rates back up if progress on inflation stalls, because financial markets might be destabilized by another pivot.
Fed Chair Jerome Powell understands the problem. He takes care in his statements and news conferences to emphasize the Fed’s “data dependence.” As he told investors last week, “I do not think that anyone should look at this and say, ‘Oh, this is the new pace.’” He denied that the Fed’s policymakers have a “plan” for future rate changes. Asked about the so-called neutral rate of interest, the level consistent over the longer term with maximum employment and the Fed’s 2% inflation target, he said, “I just don’t think we know.” In time, that is, the data will decide.
All of which is wise. Trouble is, in its other communications, the Fed isn’t always so clear. Its closely studied Summary of Economic Projections, or dot plot, is widely seen as the plan for future interest rates that Powell says the Fed doesn’t have. Its longer-term rate projections are often taken to be estimates of the neutral rate. (According to the latest dot plot, and contrary to “I just don’t think we know,” “neutral” means roughly 3%.)
