Federal Reserve officials have been debating when to drop their long-standing description of the central bank’s monetary policy as “accommodative,” and some economists think that shift is coming today.
If it does happen, Bloomberg has 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 that 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 in June ranged from 2.25% to 3.5%. 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. If those remain unchanged today, calling for another hike in December and three more next year, then policy makers are explicitly communicating that no policy shift is on the horizon.
