Jerome Powell has a bigger goal than the short-term inflation concerns about the bond market.
The Federal Reserve Chairman-in-Chief this week set out three critical messages for investors that increased the yield of bonds higher on the bet, which would eventually force the Fed to tighten. monetary policy faster than indicated.
Read more: Powell keeps Dovish Line as Fed signals zero rates until 2023
Powell’s messages? He is not unnecessarily worried about rising yields, the control of monetary policy communication lies with him and he is prepared to keep the economy warm to recover from the fall of Covid-19.
Market Rebuff
Powell during his press conference on Wednesday asked directly if he was concerned about the rise in treasury yields, and Powell referred to financial conditions and said it remained ‘very accommodating’.
It was a clear sign that he would not mind the emotional swing over inflation risk that investors were concerned about. Powell has an explicit strategy to reflect the economy, and he does not think it will be easy after decades of low inflation.
Therefore, he wants to see real data and is not convinced that inflationary sluggishness – where today’s price changes are very similar to yesterday’s – is about to change.
“The fundamental change in our framework is that we will not act mostly predictively based on forecasts, and that we will wait to see actual data,” Powell said. “I think it will take people time to adapt to it and adapt to the new practice, and the only way we can build its credibility is by doing it.”
Tantrums, however, will attract his attention.
“I am concerned about disorderly conditions in markets or through a constant tightening of financial conditions that threaten the achievement of our goals,” he added.
Grab the signal
Powell repeatedly downplayed the Fed’s quarterly summary of economic projections.
‘The SEP is not a committee forecast. This is not something we sit and debate and discuss and approve, ” he said, noting that the point of interest rate forecasts submitted by the Fed’s 18 policymakers was not a promise or even a prediction of when the committee will act. ”
The forecasts display a policy response, should other assumptions by individual officials turn out to be as expected.
But the prediction of a three-year rate hike, as seven Fed officials did, ‘is very uncertain,’ Powell says dryly noticedand added that no one had much experience in predicting how the economy would recover from a pandemic.
All these remarks deliberately weakened the policy signal of the dots. They also raised a question: if the guidance on the timing of the final sharpening does not appear in the dot, then where is it?
Powell made it clear that he lives with him.
In the choreography of tightening, the first step will be to reduce the $ 120 billion in monthly asset purchases that the Federal Public Market Committee has linked to significant further progress on employment and inflation.
Powell said it would be a judgment, or in other words a consensus of the committee for which Powell himself is responsible. “Until we give a signal, you can assume we’m not there yet,” he said.
Second term?
Managing the message gives Powell an Alan Greenspan-like, indispensable quality at a time when Fed communications are critical to the financial markets, and as a debate builds on whether he will get a second term when his current term of office ends in February. .
President Joe Biden has not yet indicated whether he is open to holding him or electing someone else.
“Powell wants to be reappointed and Democrats have kept the door open,” said Derek Tang, an economist at LH Meyer / Monetary Policy Analytics in Washington. “If the Democrats wanted to attract a favorable policy from Powell, they kept him in the game, but did not make a sure thing. This is a very sophisticated postal negotiation. ”
Bring the heat
A third message appears in the forecasts and how it will respond to unemployment. Collectively, the median of the joint outlook showed that inflation pushed slightly above 2% this year, but fell closer to the target in 2022 and 2023.
Economic growth is booming in 2021, thanks in part to fiscal policy, which has risen 6.5% and remains above the committee’s equilibrium growth rate of 1.8% for the next two years. At the end of 2023, unemployment will fall to 3.5%, which corresponds to the low point before the pandemic.
Despite all the heat, the majority of officials are still not needed to raise interest rates.
The story here is that their ‘broad and inclusive goal’ of providing maximum employment is not represented at all by the unemployment rate. Even with 3.5%, they believe that there is lax exploitation, perhaps especially in the worst segments of the labor market, such as working-age women and minorities.
Get ready on your marks!
Fed officials grow better in the economy and in the labor market, see stronger inflation
Source: Federal Reserve
Powell has been closely focused on the unequal blow the pandemic has inflicted, and he wants to get the 9.5 million Americans who lost their jobs during the Covid-19 era back to work as soon as possible.
Although the unemployment rate fell to 6.2% last month, it rose to a staggering 9.9% for black Americans, despite the fact that the economy is likely to recover strongly.
Powell argues that because inflation expectations are anchored at 2%, the Fed can keep the economy warm to deliver a more inclusive recovery without suffering a sustained rise in prices.
“Unemployment will take a long time to decline,” Powell said, and here it is safe to say he is thinking of the broader measures of unemployment. “The faster, the better. We would like to see it come sooner rather than later. We welcome nothing but that. But realistically, given the numbers, it’s going to take a while. ”