Jerome Powell has a bigger goal than the short-term bond market inflation concern.
Perhaps in his most direct press conference since taking over the central bank three years ago, the Federal Reserve chairman this week presented three critical messages to investors who have propelled the yields on higher bonds following the bet, inflation would force in eventually his Fed to tighten monetary policy faster than indicated.
Read more: Powell owns Dovish line as zero rate signaling until 2023
Powell’s messages? He is not unduly concerned about rising yields, controls monetary policy communications and is willing to run the hot economy to help it recover from the fall of Covid-19.
Market Rebuff
Asked directly during his press conference on Wednesday if he was concerned about rising Treasury yields, Powell referred to financial conditions and said they remained “extremely accommodative”.
It was a clear signal that he was not going to bother with the emotional fluctuations on the risk of inflation that haunts investors. Powell has an explicit strategy to reflect the economy and does not believe this will be easy after decades of low inflation.
Therefore, he wants to see real data and is not convinced that the inertia of inflation – if today’s price changes are very similar to yesterday’s – is about to change.
“The fundamental change in us is that we will not act preventively based on forecasts for the most part and we will wait to see real data,” Powell said. “I think it’s going to take people a while to adapt to that and to adapt to that new practice, and the only way we can really build credibility is to do it.”
Tantrums will get his attention, though.
“I would be concerned about disorderly market conditions or a persistent tightening of financial conditions that threaten to achieve our goals,” he added.
Taking advantage of the signal
Powell has repeatedly reduced the Fed’s quarterly summary of economic projections.
“SEP is not a forecast of the committee. It is not something we sit around and debate, discuss and approve, “he said, noting that the one-time plot of interest rate forecasts presented by each of the Fed’s 18 decision-makers” was not meant to be a promise or even a prediction of when the commission will act. ”
The forecasts show a political response, if other assumptions made by individual officials prove to be expected.
But forecasting a three-year rate hike, as seven Fed officials have done, “is extremely uncertain,” Powell said. noted, adding that no one has had much experience in predicting how the economy will recover from a pandemic.
All these comments deliberately devalued the political signal of the points. They also raised a question: if the guidance on when to tighten is not in the point chart, where is it?
Powell said she lives with him.
In the tightening choreography, the first step will be to reduce the $ 120 billion monthly asset purchases that the Federal Open Market Committee has linked to “substantial progress” in terms of employment and inflation.
Powell said it will be a trial or, in other words, a consensus of the committee that Powell himself is tasked with forming. “Until we give you a signal, you can assume we’re not there yet,” he said.
The second term?
Taking over the message gives an indispensable quality to Alan Greenspan, indispensable for Powell at a time when Fed communication is essential for financial markets and as the debate builds on whether he will get a second term when his current term ends. in February. .
President Joe Biden has not yet said whether he is willing to hold him or choose 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 the Democrats were trying to persuade a Powell-friendly policy, they kept it in play, but they didn’t make it a sure thing. It is a very sophisticated job negotiation. ”
Bringing the heat
A third message came in forecasts and how they will respond to unemployment. Taken together, the median of the combined outlook showed that inflation exceeded just over 2% this year, but fell closer to the target in 2022 and 2023.
Economic growth will rise in 2021, partly due to fiscal policy, up 6.5% and remaining above the committee’s growth rate of 1.8% over the next two years. Unemployment drops to 3.5% by the end of 2023, equivalent to the minimum pre-pandemic level.
Despite all that heat, most officials still don’t see much need to raise interest rates.
The story here is that their “broad and inclusive goal” of maximum employment is not at all represented by the unemployment rate. Even at 3.5%, it estimates that there will be a weakness in exploitation, probably especially in the most affected segments of the labor market, such as working-age women and minorities.
Ready Set Go!
Fed officials grow better in economy and labor market, watching firmer inflation
Source: Federal Reserve
Powell has focused closely on the uneven impact of the pandemic and wants to bring back the 9.5 million Americans who lost their jobs in the Covid-19 era as soon as possible.
Even though the unemployment rate fell to 6.2% last month, it rose to a staggering 9.9% for black Americans, despite the fact that the economy is in a solid recovery.
Powell argues that because inflation expectations are anchored at 2%, the Fed can make the economy hot to offer a more inclusive recovery without suffering a sustained rise in prices.
“Unemployment will take a long time to fall,” Powell said, and here it is safe to say that he is thinking of broader measures of unemployment. “The faster, the better. We’d love to see him come sooner rather than later. I wouldn’t get anything but that. But realistically, given the numbers, it will take some time. ”