Jerome Powell has a goal that is bigger than concerns about short-term inflation in the bond market.
In perhaps his most frank press conference since taking over the helm of the central bank three years ago, the chairman of the Federal Reserve this week delivered three critical messages for investors who have been pushing bond yields higher because of the gamble. that inflation would eventually force its Fed to adjust. monetary policy faster than it has been indicating.
Read more: Powell maintains a moderate line as the Fed signals zero rates until 2023
Powell’s messages? He is not overly concerned about rising yields, control of monetary policy communications resides with him, and he is willing to heat up the economy to help it recover from the consequences of Covid-19.
When asked directly during his press conference Wednesday if he was concerned about rising Treasury yields, Powell referred to financial conditions and said they remain “very accommodative.”
It was a clear sign that he was not going to bother with the emotional swings about inflation risk that obsess over investors. Powell has an explicit strategy to jumpstart the economy and doesn’t think this will be easy after decades of low inflation.
So you want to see real data and are not convinced that the inertia of inflation, where today’s price changes look a lot like yesterday’s, is about to change.
“The fundamental change in our framework is that we are not going to act preemptively based on forecasts for the most part and we are going to wait to see real data,” Powell said. “I think it will take time for people to adjust to that and adjust to that new practice, and the only way we can really build the credibility of that is by doing it.”
However, tantrums will get your attention.
“I would be concerned about disorderly conditions in the markets 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 committee forecast. It is not something that we sit down to debate, discuss and approve, “he said, noting that the dot plot of the interest rate forecasts presented by each of the Fed’s 18 policymakers” was not intended to really be a promise or even a prediction of when the committee will act. “
The forecasts show a political response, if other assumptions made by individual officials turn out as expected.
But forecasting a rate hike three years from now, as seven Fed officials did, “is very uncertain,” Powell said dryly. indicated, adding that no one had much experience predicting how the economy will recover after a pandemic.
All of these comments intentionally devalued the political signal of the dots. They also raised a question: if the guidance on the timing of eventual adjustment does not lie in the dot plot, where is it?
Powell made it clear that he resides with him.
In choreographing the tightening, the first step will be to reduce the $ 120 billion of monthly asset purchases that the Federal Open Market Committee has linked to “additional substantial progress” in employment and inflation.
Powell said it will be a trial, or in other words, a consensus committee that Powell himself is responsible for forming. “Until we give you a signal, you can assume we’re not there yet,” he said.
Taking command of the message gives Powell an indispensable quality, similar to that of Alan Greenspan, at a time when Fed communication is critical to financial markets, and as debate grows over whether he will get a second term when his Current term as president ends in February. .
President Joe Biden has yet to indicate whether he is willing to keep it or elect someone else.
“Powell would like to be re-elected 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 convince Powell of a favorable policy, they have kept it in play, but they have not made it a sure thing. It is a very sophisticated labor negotiation ”.
Bringing the heat
A third message came in the forecasts and how they will respond to unemployment. Taken together, the median combined outlook showed that inflation rose slightly above 2% this year, but came closer to target in 2022 and 2023.
Economic growth advances in 2021 thanks in part to fiscal policy, which increased 6.5% and remained above the committee’s equilibrium growth rate of 1.8% for the next two years. Unemployment falls to 3.5% by the end of 2023, matching the pre-pandemic low.
Despite all that heat, most officials still don’t see much need to raise interest rates.
The story here is that your “broad and inclusive goal” of maximum employment is not represented at all by the unemployment rate. Even at 3.5%, they estimate that there will be room to exploit, perhaps especially in the most affected segments of the labor market, such as women of working age and minorities.
Powell has been closely focused on the uneven blow from the pandemic, and wants the 9.5 million Americans who lost their jobs during the Covid-19 era to get back to work as quickly as possible.
Even though the unemployment rate fell to 6.2% last month, it rose to a staggering 9.9% for African Americans despite the economy reportedly in a strong recovery.
Powell argues that because inflation expectations are anchored at 2%, the Fed can warm up the economy for a more inclusive recovery without experiencing a sustained rise in prices.
“Unemployment is going to take a long time to go down,” Powell said, and here it’s safe to say that he’s thinking about broader measures of unemployment. “The faster the better. We’d love to see him arrive sooner rather than later. We wouldn’t welcome anything more than that. But realistically, given the numbers, it will take some time.”