Between deep wounds to the labour market and weak inflation, United States Federal Reserve Chair Jerome Powell delivered a simple message to investors fixated on rising US 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 Committee on Financial Services in the US Congress, Powell continued adding weight to the US 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 two percent target through 2023.
The Fed has said it will not raise interest rates until inflation has exceeded two percent, and Powell noted “we believe we can do it; we believe we will do it … it may take more than three years”.
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 the Fed is not going to tighten monetary policy until it’s clear people are getting back to work.
Yields on US Treasury bonds have risen recently, with the risk of a potential spike in inflation in focus as the US expands its coronavirus vaccination programme, 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 US 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 $120bn per month in US 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 labour market as well — a scar that goes well beyond the 6.3 percent headline unemployment rate to include concerns about disproportionate joblessness among minorities, and the exodus of women from the labour force.
In recent weeks, Powell and others have used an alternate measure of around 10 percent that includes, for example, those who have left the labour 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.”