The Fed: On hold with a dovish tilt

The Fed: On hold with a dovish tilt

The Fed's focus on below-target inflation leaves the door open to future rate cuts.

The headlines after today's Fed meeting will surprise no one. The FOMC left rates unchanged, indicated that it views current policy as “appropriate,” and its dots showed no change in rates for at least the next twelve months.

Beyond the headlines, however, there was a dovish tilt to the meeting which was especially apparent in the discussion about inflation. Low inflation was a common theme running through many of Chair Powell's comments, and on multiple occasions he reiterated his commitment to getting inflation higher. The Fed's ongoing framework review is also focused, in part, on the challenge of below-target inflation and what can be done about it. I suspect the focus on inflation in today's meeting was consistent with the direction of that review.

The following are some of the ways that the focus on low inflation came through in today's meeting and press conference:

  • Previously, the post-meeting statement mentioned “uncertainties about the outlook.” That phrase was dropped today, and in its place the statement now includes that the committee is monitoring “global developments and muted inflation pressures.” Later, Powell emphasized that “muted inflation pressures” were a “key thing this year” and that “they haven't gone away.”
  • Powell was asked whether the Fed could hike rates next year and reverse this year's cuts, as happened in 1999 following the three cuts in 1998. In his response, Powell acknowledged there were similarities between 1998 and today. But, he said, the key thing is that the dynamics around inflation are very different today than they were then. In particular, Powell noted that inflation is barely moving up, despite the unemployment rate remaining quite low, and that “in fact we need some upward pressure on inflation.”
  • Powell reiterated his view that in order to move rates up he wants to first see “inflation that is persistent, and that is significant.” This was a key statement from the October press conference, and Powell repeated it almost verbatim today. A caveat is needed on this statement. While he did repeat his statement from October, Powell also made clear that he was speaking for himself, rather than reflecting a consensus of the committee. He even went out of his way to explain that the criteria is not official forward guidance. That is not especially surprising—after all, the criteria was not included in the post-meeting statement, which is where official forward guidance belongs—but Powell's emphasis here does dampen the impact somewhat. That caveat aside, the direction is clear and this could be revisited in the ongoing framework review, at which point it could become official forward guidance.
  • Powell said that a number of FOMC participants wrote down forecasts that included inflation above 2%. While that is not reflected in the median dots, nor is it yet part of the Fed's official goal, it is nonetheless notable that some FOMC participants are openly discussing the desirability of an inflation overshoot. A clearer statement from the Fed about aiming for inflation above 2% is another thing that could come out of the framework review.
  • Powell was somewhat defensive when asked about whether the Fed is doing enough to get inflation back up to target. He emphasized that the framework review is not just about rhetoric or goals, but instead will have consequences in terms of actions. He said the Fed is committed to “backing up with policy that supports the outcome [of 2% inflation]. That is what we are trying to do.” And he went on to say that the framework review would only matter “if followed by policy.” In my view, the Fed deserves some credit for backing up its goals with actions this year, and Powell is saying that there would be more action to come, if needed.

In my view, the Fed's focus on below-target inflation, as evidenced by both today's statement and press conference, leaves the door open to future rate cuts in order to further support inflation. While Powell did not signal that any such action is particularly imminent, nor is it in the FOMC's current base case, the implied openness to future action provided the dovish tilt to today’s meeting.


The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.


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