Jerome Powell has a bigger goal than worrying about short-term bond market inflation.
Perhaps in its most direct press conference since taking over the helm of the central bank three years ago, the Federal Reserve presidency presented three critical messages this week for investors who have boosted yields on higher bonds in the bet that inflation would eventually force the Fed to tighten monetary policy faster than indicated.
Read more: Powell maintains Dovish line as zero Fed sign rate until 2023
Powell’s messages? He is not unduly concerned about rising yields, is in control of monetary policy communications and is willing to run the economy to help it recover from the fall of Covid-19.
Market rebuff
Asked directly during Wednesday’s press conference if he was concerned about rising Treasury yields, Powell referred to financial conditions and said they remain “very accommodating.”
It was a clear signal that he would not worry about emotional changes because of the risk of inflation that investors are obsessed with. Powell has an explicit strategy for reflecting the economy and does not think this will be easy after decades of low inflation.
So he wants to see real data and is not convinced that the inertia of inflation, where today’s changes in prices are very similar to yesterday’s, is about to change.
“The fundamental change in our framework is that we will not act preventively based on forecasts for the most part and we will wait to see the actual data,” Powell said. “I think it will take people a while to adapt to that and to adapt to this new practice, and the only way to make it credible is to do it.”
Tantrums will catch your eye, though.
“I would be concerned about disorderly market conditions or a persistent tightening of financial conditions that threaten the achievement of our goals,” he added.
Taking advantage of the signal
Powell repeatedly downplayed the Fed’s Quarterly Summary of Economic Projections.
“The SEP is not a forecast of the committee. It’s not something we sit down to debate, discuss and approve, ”he said, noting that the timely plot of interest rate forecasts presented by each of the Fed’s 18 policymakers“ should not be a promise not even a prediction of when the committee will act “.
Forecasts show a political response, if other assumptions made by individual officials appear as expected.
But predicting a rate hike three years later, as seven Fed officials did, “is highly uncertain,” Powell noted. pointed out, adding that no one had much experience in predicting how the economy will recover after a pandemic.
All of these comments intentionally devalued the points policy signal. They also posed a question: if the indications about the time of eventual closure do not reside in the point diagram, where is it?
Powell made it clear that she resides with him.
In the hardening choreography, the first step will be to reduce the $ 120 billion in monthly asset purchases that the Federal Open Market Committee has set in “substantial progress” in 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.
Second term?
Taking control of the message gives Powell an essential quality similar to Alan Greenspan at a time when Fed communication is critical to financial markets, and as the debate builds on whether he will get a second term when his term ends. current stage as president in February.
President Joe Biden has not yet indicated whether he is willing to keep it or choose someone else.
“Powell would like to be re-appointed and Democrats have kept the door open,” said Derek Tang, an economist at LH Meyer / Monetary Policy Analytics in Washington. “If the Democrats tried to convince Powell of a favorable policy, they would have kept it at stake but not made it a safe thing. It’s a very sophisticated labor negotiation.”
Bringing the heat
A third message came to the forecasts and how they will respond to unemployment. Overall, the median of the combined outlook showed that inflation rose slightly above 2% this year, but that it approached the target in 2022 and 2023.
Economic growth is ahead of 2021 thanks in part to fiscal policy, which rose 6.5% and remains above the committee’s equilibrium growth rate of 1.8% over the next two years. years. Unemployment falls to 3.5% by the end of 2023, equaling the pre-pandemic low.
Despite all this heat, most officials still do not see the need to raise interest rates.
The story here is that their “broad and inclusive” goal of maximum employment is not represented at all by the unemployment rate. Even with 3.5%, they estimate that there will be little exploitation, perhaps especially in the most affected segments of the labor market, such as working-age women and minorities.
Ready, ready, now!
Fed officials increasingly optimistic about the economy and labor market, see firmer inflation
Source: Federal Reserve
Powell has focused heavily on the unequal blow caused by the pandemic and wants to recover the 9.5 million Americans who lost their jobs during the Covid-19 era as quickly as possible.
Although the unemployment rate fell last month to 6.2%, it rose to a staggering 9.9% for black Americans, despite the economy being in a solid recovery.
Powell argues that because inflation expectations are anchored at 2%, the Fed can ignite the economy to achieve a more inclusive recovery without suffering a sustained rise in prices.
“Unemployment will take quite some time to go down,” Powell said, and here it is safe to say he is thinking about broader measures of unemployment. “The faster the better. We would love for it to arrive sooner rather than later. We would appreciate nothing more than that. But really, given the numbers, it will take a while. “