Photographer: Samuel Corum / Bloomberg
Photographer: Samuel Corum / Bloomberg
Federal Reserve Chairman Jerome Powell will likely try to convince suddenly skeptical financial markets on Thursday that the central bank will be extremely patient to withdraw its support for the economy after the pandemic ends.
Rather than trying to contain rising yields, Fed watchers expect Powell to use his appearance on a Wall Street Journal webinar to reaffirm the Fed’s determination to meet its renewed employment and inflation targets through monetary policy for longer. loosen up, and to. Clearly, he wants to avoid a repeat of last week’s disorderly bond market.
“It’s not a matter of trying to bring the market down,” said Michael Feroli, JPMorgan Chase & Co.’s chief economist. “But you want interest rates to be in line with the Fed’s targets.”
This is important for the long-term health of the economy. If the markets and the Fed are in sync, they will work together to achieve the central bank’s goals of maximum employment and 2% average inflation within its new strategic framework.
Long-term interest rates have risen this year – the yield on the Treasury’s 10-year note was 1.48% at 4:50 p.m. New York Wednesday, up less than 1% in early 2021 – as vaccines become more widespread to fight the virus and the promise of increased government spending have fueled expectations of much faster economic growth.
Brainard patient
In what may have been a preview of Powell’s comments, Governor Lael Brainard on Tuesday stressed how far the Fed was from achieving its goals.
“We have a lot of ground to cover,” she said told a webinar from the Council on Foreign Relations. “It is appropriate to be patient.”
Brainard said the speed of bond market movements had “caught my attention” last week, adding that she would be concerned if she saw disorderly trading or a sustained tightening of financial conditions, which would drive progress towards the targets. of the Fed could slow.
In a testimony to Congress on Feb. 23-24, Powell downplayed concerns that rising yields would hurt the economy, instead declaring at one point that they were a “ statement of trust ” in the outlook.
Read more: ‘Dude, get back to your desk’: The Week That Roiled Bond Markets
The markets blew up the next day, with the yield on 10-year Treasury bonds rising briefly to 1.6%.
Investors have also put forward their expectations for the Fed’s first rate hike in early 2023, when they began to have doubts about the central bank’s pledge to hold policy easily until inflation exceeds 2%.
“Early 2023 seems pretty early to me,” said Goldman Sachs Group chief economist Jan Hatzius, who doesn’t expect an increase until 2024.
PGIM Fixed Income chief economist Nathan Sheets said this will not be the last time the Fed is faced with rising long-term interest rates. He sees 10-year yields rise to 2% in the summer, before declining by the end of the year.
The Fed has several ways of curbing an interest rate hike if it needs it.
Watch: Danielle DiMartino Booth, CEO of Quill Intelligence discusses last week’s chaotic sell-off in Treasuries, the outlook for the economy and Fed policy.
Guidance Lite
More words come first. Call it forward guidance lite.
The central bank is currently buying $ 120 billion in assets per month – $ 80 billion in Treasury bonds and $ 40 billion in mortgage-backed debt – and has pledged to keep that pace “until substantial further progress is made” towards it. goals.
To help anchor yields, policymakers could become more explicit about when to start cutting back on purchases. Fed Vice Chairman Richard Clarida took a step in that direction last week, suggesting that the current pace of purchase would be appropriate for the remainder of 2021.
Policy makers could also be clearer about what it takes to raise interest rates. They have said they will keep rates near zero until the labor market reaches maximum employment and inflation has risen to 2% and is on track to moderately exceed that level for some time. But those thresholds are somewhat amorphous and open to interpretation.
After the words, action would come. The Fed could step up its bond buying program or shift purchases of mortgage-backed securities to Treasury bills.
Operation Twist
Another option: a revival of Operation Twist, where the Fed eliminates its holdings of Treasury bills and puts the money into longer-dated securities. This would have the added benefit of easing the downward pressure on account rates, which are in danger of turning negative.
The Fed could also follow its Australian counterpart and get the yield curve under control by limiting short-term government bond yields – a strategy Brainard has been endorsing in the past.
Lou Crandall, chief economist of Wrightson ICAP LLC, said Powell should be careful about pushing back interest rate expectations ingrained in the Treasury market. The following summary of the Fed’s economic projections, to be released after the March 16-17 policy meeting, could show that a growing number of policymakers are envisioning a rate hike in 2023.
Powell could instead highlight the Fed’s new modus operandi for monetary policy within the framework it adopted last year.
“He could try to draw the market’s attention to the degree of regime change in the Fed’s thinking,” Crandall said.
– With the help of Craig Torres