(Reuters) – A recent rise in US bond yields and market inflation expectations have bolstered the Federal Reserve’s hope that the central bank’s new monetary policy approach will catch on and can be further stimulated if a Democrat-led Congress spends more spending.
“I feel encouraged to see the rise in market indicators of inflation expectations. … That’s what we’re trying to support, ”Richmond federal president Thomas Barkin said in an interview with Reuters on Thursday.
Barkin said he also viewed a recent rise in government bond interest rates as part of a “ reflation trade, ” a sign that investors were taking future price hikes into account in their decisions by demanding higher interest rates, rather than a worrying tightening of financial terms.
“The ingredients for higher inflation are there,” James Bullard, president of the St. Louis Fed, said in separate comments to reporters. “You have very strong fiscal policies and maybe more to come,” with Democrats now on the verge of controlling the White House, as well as the US Senate and the House of Representatives.
“You have a Fed that wants to … temporarily keep inflation above target. The economy is poised to boom at the end of the pandemic, ”Bullard said once the impact of new coronavirus vaccines is felt.
The yield on the benchmark 10-year Treasury rose above 1.07% on Thursday, hitting its highest level since March. Expected inflation over 5 years almost reached a two-year high of 2.05%.
‘INCREDIBLY DISAPPOINTING’
After nearly two years of study, the Fed changed its approach to monetary policy in August to allow for higher inflation, hoping to meet its 2% average target by driving prices higher for some time to offset years of inflation. been weak.
That would in theory also allow for a lower unemployment rate, as the central bank would try to sustain the kind of “hot” economy that leads to rising prices.
The enormous uncertainty about the economy and the course of the pandemic late last summer has since given way to what Barkin said: more ‘clarity’ about what matters – with the spread of two coronavirus vaccines, fiscal buffers to many American households. help, and consumers “not far” from the point where they “will participate in the economy with much more confidence”.
The pace of vaccine distribution will play a huge role when that happens, with some policymakers expressing dismay at the efforts so far.
Patrick Harker, president of the Philadelphia Fed, called the US early vaccination rates, with fewer than 5 million vaccinated so far, “incredibly disappointing.”
But the events of recent weeks seem to have shifted market expectations for the future, with trading in inflation-linked securities indicating that investors expect higher inflation and accept that the Fed will not get in the way.
“We are looking at a long period of time when the fed-funds rate will remain essentially zero,” Harker said, referring to the central bank’s main overnight rate. He added that he saw no signs that “inflation is going to get out of hand”.
The president of the Chicago Fed, Charles Evans, expressed even more skepticism about the inflation that was to come, even with the additional government stimulus that may be underway to combat the economic consequences of the pandemic and the recession it caused.
The rise in inflation from additional fiscal spending, he told a banking group on Thursday, is “not nearly as strong as I’d like.” He said he believes inflation will not reach 2% until 2023 and that it would not be unreasonable for the Fed to wait until mid-2024 before raising short-term interest rates from their current levels of near zero.
Mary Daly, president of the San Francisco Fed, said on Thursday in an event hosted by the Manhattan Institute’s Shadow Open Market Committee that she believes a stronger labor market will eventually lead to higher inflation, although upward pressure on prices of a tight labor market is likely. weaker than in the past, making a sudden rise unlikely.
That means, she stated, that the Fed can strengthen the labor market further than was possible in the past.
At the same time, Daly said she was reassured by a rebound in inflation expectations, which showed that market participants, households and businesses are beginning to believe the Fed will deliver on its target of exceeding inflation by 2%.
Reporting by Jonnelle Marte, Howard Schneider and Ann Saphir; Adaptation by Paul Simao and Lincoln Feast.