The Fed Will Soon Switch Off the Autopilot
Two more hikes will put interest rates at just about the bottom end of what is estimated to be a neutral monetary policy.
Federal Reserve Chairman Jerome Powell is expected the lift interest rates next week.
Photographer: Chip Somodevilla/Getty Images North AmericaOn the heels of Friday's solid monthly jobs report, the Federal Reserve will almost certainly lift interest rates next week for the seventh time since December 2015, bringing them closer to a level that is considered neutral. Absent clear inflationary threats, however, policy makers have little reason to rush to tighten beyond neutral and risk a significant slowdown of economic activity. But gauging the correct level of the neutral rate is easier said than done, which means the Fed will likely turn off the autopilot toward the end of the year in favor of a more nuanced approach to rate hikes.
Current economic conditions provide policy makers plenty of reason to continue boosting their target for the federal funds rate from the current range of 1.50 percent to 1.75 percent. Notably, job growth remains sufficient to place downward pressure on the unemployment rate, currently at 3.8 percent and below what the Fed considers to be full employment. While the Fed knows its estimate might be wrong, it also recognizes that unemployment is at levels not seen since 2000, leaving some risk of overheating. The Fed does not want to be far from the neutral policy rate should that risk emerge.