WASHINGTON: Between deep wounds to the labor market and weak inflation, Federal Reserve Chair Jerome Powell delivered a simple message to investors fixated on rising U.S. bond yields and price risks: watch the data, and don’t expect any changes in monetary policy until the economy is clearly improving.
Testifying before the House of Representatives Financial Services Committee, Powell continued adding weight to the U.S. central bank’s promise to get the economy back to full employment, and to not worry about inflation unless prices begin rising in a persistent and troubling way.
“We are just being honest about the challenge,” Powell told lawmakers when asked about Fed projections that inflation will remain at or below the central bank’s 2% target through 2023.
The Fed has said it will not raise interest rates until inflation has exceeded 2% and “we believe we can do it, we believe we will do it. It may take more than three years,” Powell said.
An expected jump in prices this spring, he said, may reflect post-pandemic supply bottlenecks, or a jump in demand as the economy reopens, but nothing to warrant a policy response.
Powell’s remarks are just the latest in a broad central bank effort to convince the public and particularly bond market investors that it is not going to tighten monetary policy until it’s clear people are getting back to work.
Yields on U.S. Treasury bonds have risen recently, with the risk of a potential spike in inflation in focus as the United States expands its coronavirus vaccination program, plans further fiscal spending, and moves toward a post-pandemic reopening of the economy.
‘FRONT-RUNNING THE FED’
While some observers believe the Fed may need to remove crisis-era policies sooner than expected, that argument ignores the Fed’s new jobs-first framework, said Tim Duy, chief U.S. economist with SGH Macro Advisors.
“If we try to force the Fed into the old framework, we will be front-running the Fed. The Fed will not validate such front-running,” Duy wrote of Powell’s appearances this week before House and Senate committees. “The Fed intends to maintain easy policy until the data pushes it in another direction and the Fed does not expect that to happen for a long, long time.”
The Fed, for example, has said it plans to continue buying $120 billion per month in U.S. government and government-backed securities “until substantial further progress has been made” towards the Fed’s maximum employment and inflation goals.
With the inflation target a long way off, Fed officials have focused on what they see as a major gap in the labor market as well – a scar that goes well beyond the 6.3% headline unemployment rate to include concerns about disproportionate joblessness among minorities, and the exodus of women from the labor force.
In recent weeks, Powell and others have used an alternate measure of around 10% that includes, for example, those who have left the labor force in recent months, and even that may fall short of the damage to workers the Fed hopes to repair.
Powell, who testified in Congress this week as part of his mandated twice-a-year appearances on Capitol Hill to provide updates on the economy, said the Fed needs to see tangible progress before shifting gears, not just anticipated improvement, and not premature bets from the bond market.
“We are not acting on forecasts,” Powell said. The policy “is what it sounds like – incoming actual data that sees us moving closer to our goals.”
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