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Washington (AFP)
Brilliant investors have sawn between celebrating the expected economic recovery in the US and nailing a possible price spiral, but the Federal Reserve is determined to keep interest rates low.
In the balance between faster growth and rising prices to restore some of the more than nine million jobs still missing due to the Covid-19 pandemic, Fed Chairman Jerome Powell’s message was clear: he wants to see more people back to work.
Analysts expect the Fed’s Federal Policy Committee for Public Markets (FOMC) to maintain its very “deaf” stance when it holds its two-day policy meeting next week.
Powell is expected to reiterate on Wednesday that the Fed is prepared to accept higher inflation in order to return to full employment, a goal that took a decade to reach after the global financial crisis in 2008.
“I think it’s ‘markets doomed’ at this point,” said Robert Frick of the Navy Federal Credit Union.
“The Fed has said that until the real improvement in employment and in the economy, they are not going to move,” Frick told AFP. “I really do not think they are going to falter.”
From a 50-year low of 3.5 percent unemployment before the pandemic blockade began in early 2020, the unemployment rate increased when millions of workers were sent home, but gradually fell back to 6.2 percent in February amid reopening.
As vaccine rollout has increased rapidly and President Joe Biden has signed a massive $ 1.9 billion stimulus package, increasing the chances that the world’s largest economy could reopen soon, investors have begun to fear an inflationary spiral.
This is reflected in the rise in government debt yields, especially on 10-year treasury notes, a canary in the coal mine for upcoming price increases.
– Hot but not boiling –
Although the rebound to the early 2020 level can be seen as something of a market freak, there are consequences of the rising treasury yields in the real world as the mortgage rates for home mortgages and car loans are linked to it.
Mortgage rates have started to rise, which could cost some buyers from an already hot home market, while existing homeowners will find it harder to refinance their loans, said Kathy Bostjancic of Oxford Economics.
Inflation is expected to recover as the economic engine picks up, especially compared to the lower prices seen at the close of the pandemic, but any sharp rises are expected to be temporary.
“The reopening of the economy is going to be turbo-charged by this fiscal stimulus of $ 1.9 billion, so there is no doubt” inflation will rise, Bostjancic told AFP.
The critical question is how high ‘and for how long’, she said.
“It’s going to feel warmer, but we do not think it’s a situation with overheating.”
In more than a decade, inflation has rarely risen above the Fed’s target of 2.0%, and the central bank’s preferential price measure was only 1.5 per cent higher in January than a year earlier.
Bostjancic and Frick agree with many economists who say that the economy is very weak which will dampen price increases.
– Signal to markets –
Powell acknowledged that prices would rise, but promised that the Fed would not withdraw stimulus until the economy returned to maximum jobs – which is likely not this year – and inflation both above 2.0 percent. goal was and was on course to stay there. “for some time.”
“We do not intend to raise interest rates until we meet the conditions,” Powell said.
However, the Fed is not impenetrable to market shocks, and Powell could once again try to calm inflation fears by sending a stronger signal that the central bank will use its instruments to yield worrying price increases or bond effects.
Although he is not committed to the details, he could give more details in his press conference on Wednesday, including his willingness to change the debt mix the Fed buys each month.
Bostjancic notes that the Fed could take another technical step to ease yield pressures by extending the pandemic exemption on treasury bank holdings without having a cash buffer.
The release expires at the end of the month.
© 2021 AFP