International Monetary Fund Managing Director Christine Lagarde affirmed the Federal Reserve’s current monetary policy path following the central bank’s four rate hikes in 2018.
When asked by Yahoo Finance Editor-in-Chief Andy Serwer whether the Fed’s normalization of interest rates “makes sense to you,” Lagarde assented, albeit with conditions.
“If it is data-dependent, if it is well-communicated – yes absolutely,” Lagarde said, speaking at the World Economic Forum in Davos, Switzerland.
The Federal Reserve has embarked on a path to bring the benchmark interest rates closer to a neutral rate, or at a level that would neither overly stimulate nor slow down growth. The Fed most recently raised its target range for its benchmark funds rate to 2.25% to 2.5% in December, marking the fourth rate increase in 2018 and the ninth since the central bank began normalizing rates in December 2015. Fed officials said at the time that “some further gradual increases” in the range for the federal funds rate would be needed to bring interest rates to a neutral level.
Lagarde had previously defended the Fed’s interest rate increases in October and said it is “inevitable that central banks make the decisions they make” amid improving signs from the broader economy, such as low unemployment and near-target-level inflation. Her comments came after President Donald Trump criticized the central bank for its rate hike in late September, which contributed in part to fourth-quarter stock market volatility.
The Fed has also taken up a path toward balance sheet normalization, allowing its large holdings of Treasurys and mortgage-backed securities to roll off its balance sheet at a pace of up to $50 billion per month. Former Fed Chair Janet Yellen began the unwinding process in 2017 to undo some of the Fed’s balance sheet bloat after years of quantitative easing.
Federal Reserve officials, however, have recently telegraphed that they remain committed to data dependence, considering factors including economic growth, jobs and consumer spending in order to determine the path forward for both interest rates and balance sheet normalization. The Fed has also stepped up its efforts to communicate with investors, with Powell announcing last summer that he would hold a news conference after every central bank meeting starting in January this year. Lagarde praised the central bank on both of these fronts.
“All we are saying about central banks and the Fed is please stay as data dependent as you have been and continue to be so, and please communicate as judiciously and as appropriately…as you have done,” Lagarde said.
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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