Jerome Powell has a goal that goes beyond concerns about short-term inflation in the bond market.
In arguably his most candid press conference since taking the helm of the central bank three years ago, the Federal Reserve Chairman this week issued three critical messages to investors who have pushed bond yields higher on the bet that inflation is Fed. would eventually force tightening. monetary policy faster than it has indicated.
Read More: Powell Holds Dovish Line While Fed Signals Zero Rates Through 2023
Powell’s messages? He is not overly concerned about rising yields, control of monetary policy communications rests with him, and he is willing to keep the economy warm to help it recover from the effects of Covid-19.
Market rejection
When Powell was directly asked at his press conference on Wednesday whether he was concerned about the rise in government bond yields, he referred to the financial conditions and said they remain “very accommodative.”
It was a clear signal that he wouldn’t care about the emotional swings about inflation risk that obsess investors. Powell has an explicit strategy for reviving the economy and he doesn’t think this will be easy after decades of low inflation.
That’s why he wants to see current data and he’s not convinced that inflation inertia – where today’s price changes look a lot like yesterday’s – is about to change.
“The fundamental change in our framework is that, for the most part, we will not act preventively based on forecasts and we will wait to see the actual data,” Powell said. “I think it will take people time to adapt to that and to adapt to that new practice, and the only way we can really build credibility for that is by doing it.”
But tantrums will get his attention.
“I would be concerned about disorderly market conditions or a continued tightening of financial conditions that jeopardize the achievement of our goals,” he added.
Grabbing the signal
Powell repeatedly downplayed the Fed’s quarterly summary of economic projections.
“The SEP is not a commission forecast. It’s not something we hang out and debate and discuss and approve, ” he said, noting that the dot chart of interest rate forecasts submitted by each of the Fed’s 18 policymakers “ wasn’t meant to be a pledge or even a prediction of when the committee will act. “
The forecasts reflect a policy response if other assumptions made by individual officials turn out as expected.
But predicting a three-year rate hike, as seven Fed officials did, “is highly uncertain,” Powell says dryly. noted, adding that no one had much experience predicting the recovery of the economy after a pandemic.
All of these comments have deliberately devalued the policy signal of the dots. They also asked a question: If guidelines for the timing of any tightening are not in the dot plot, where are they?
Powell made it clear that he lives with him.
In the choreography of tightening, the first step will be to wind down the $ 120 billion in monthly asset purchases that the Federal Open Market Committee has linked to “substantial further progress” in employment and inflation.
Powell said that will be a judgment, or in other words, a committee consensus that Powell himself must form. “Until we give you a signal, you can assume we’re not there yet,” he said.
Second semester?
Taking over the message gives Powell an Alan Greenspan-esque, indispensable quality at a time when Fed communication is critical to the financial markets, and as the debate builds on whether he will get a second term in office as his current chair in February ends. .
President Joe Biden has yet to state whether he is open to apprehending him or choosing someone else.
“Powell would like to be reappointed and the Democrats have kept the door open,” said Derek Tang, an economist at LH Meyer / Monetary Policy Analytics in Washington. If Democrats tried to elicit a favorable policy from Powell, they kept him in the game, but didn’t make him sure. It’s a very sophisticated job negotiation. “
Bringing the heat
A third message came in the forecasts and how they will respond to unemployment. Taken together, the median of the combined outlook showed that inflation was slightly above 2% this year, but fell closer to the target in 2022 and 2023.
Economic growth will continue to accelerate in 2021, thanks in part to fiscal policy, which will rise by 6.5% and remain above the commission’s equilibrium growth rate of 1.8% for the next two years. Unemployment will fall to 3.5% by the end of 2023, which is in line with the pre-pandemic low.
Despite all the heat, a majority of officials still don’t see the need to raise interest rates.
The story here is that their “broad and inclusive goal” of maximum employment is not at all reflected by the unemployment rate. Even at 3.5%, they think there will be room for exploitation, perhaps especially in the hardest-hit segments of the labor market, such as working-age women and minorities.
Ready Set Go!
Fed officials are becoming more optimistic about the economy and labor market, seeing firmer inflation
Source: Federal Reserve
Powell is closely focused on the uneven blow that caused the pandemic, and he wants to get the 9.5 million Americans who lost their jobs during the Covid-19 era back to work as soon as possible.
Although the unemployment rate fell to 6.2% last month, it rose to a staggering 9.9% for black Americans, despite the economy supposedly in a robust recovery.
Powell argues that because inflation expectations are anchored at 2%, the Fed can keep the economy warm to bring about a more inclusive recovery without suffering from sustained price increases.
“Unemployment will take quite some time to decline,” Powell said, and here we can safely say that he is thinking about the broader measures of unemployment. “The faster the better. We would like to see it sooner than later. We would welcome nothing more than that. But realistically, given the numbers, it will take a while. “