Photographer: Samuel Corum / Bloomberg
Photographer: Samuel Corum / Bloomberg
Federal Reserve Chairman Jerome Powell is likely to suddenly try to convince skeptical financial markets on Thursday that the central bank will be extremely patient in withdrawing its support to the economy after the pandemic ended.
Instead of trying to curb rising long-term interest rates, Fed viewers expect Powell to use his appearance on a Wall Street Journal webinar to reaffirm the Fed’s determination to meet its revised employment and inflation targets through monetary policy. to make policy disappear longer and to make it apply it is clear that he wants to avoid a repeat of last week’s disorderly bond market.
“It’s not a problem to try to break down the market,” said JPMorgan Chase & Co. economist Michael Feroli. “But you want interest rates to be in line with the Fed’s targets.”
This is important for the long-term health of the economy. If the markets and the Fed are in step, they will work together to achieve the central bank’s goals of maximum employment and average inflation of 2% within its new strategic framework.
Long-term interest rates have climbed this year – the yield on the Treasury’s 10-year note was 1.48% in New York on Wednesday at 16:50, compared to less than 1% at the beginning of 2021 – as the spread of vaccines to fight the virus and the promise of intensified government spending has put forward expectations of much faster economic growth.
Brainard patient
In what may have been a preview of Powell’s remarks, Gov. Lael Brainard on Tuesday stressed how far the Fed has come in achieving its goals.
“We have a lot of land to cover,” she said. said a webinar from the Council on Foreign Relations. “It’s appropriate to be patient.”
Brainard said that the speed of the movements in the bond market last week ‘caught my attention’, adding that she would be concerned if she saw disorderly trading or a persistent tightening in financial conditions, which is the progress towards could delay the Fed’s targets.
In congressional testimony on 23 and 24 February, Powell expressed concern that rising yields would hurt the economy, and instead stated at one point that it was a “declaration of confidence” in the outlook.
Read more: ‘Dude, come back to your desk’: the week that cultivated bond markets
The markets inflated the next day, with 10-year Treasury yields briefly rising to 1.6%.
Investors also raised their expectations for the first Fed rate hike until early 2023 when they questioned the central bank’s commitment to keeping policy easy until inflation exceeds 2%.
“I notice it quite early in 2023,” said Jan Hatzius, chief economist at Goldman Sachs Group, who expects an increase only in 2024.
PGIM Fixed Income chief economist Nathan Sheets said this would not be the last time the Fed would be faced with rising long-term interest rates. He sees the 10-year yield climb to 2% during the summer before declining towards the end of the year.
The Fed has different ways of returning at a rate of return if it deems it necessary.
Watch: Danielle DiMartino Booth, CEO of Quill Intelligence, discusses the chaotic sell-off in the treasury last week, the outlook for the economy and Fed policy.
Guidance Lite
First, more words will come. Call it forward guidance lite.
The central bank is currently buying $ 120 billion in assets per month – $ 80 billion in treasury bonds and $ 40 billion in mortgage-backed debt – and has promised to keep pace “until significant further progress is made on its goals.
To help anchor returns, policymakers can become more explicit about when they are going to reduce purchases. Fed Vice President Richard Clarida took a step in that direction last week, suggesting that the current pace of purchases for the rest of 2021 would be appropriate.
Policymakers may also be more definite about what it will take to raise interest rates. They said they would keep rates almost zero until the labor market reached maximum employment and inflation rose to 2% and that it would be on track for some time. But these thresholds are somewhat amorphous and open to interpretation.
After the words, action would come. The Fed could tighten its bond buying program or shift purchases of mortgage-backed bonds to treasury.
Operation Twist
Another option: a repeat of Operation Twist, in which the Fed eliminates its holdings of treasury bills and puts the money in longer securities. This will have the added benefit of easing the downward pressure on exchange rates, which threatens to turn negative.
The Fed could also track its Australian counterpart and control the yield curve, with the aim of limiting short-term treasury yields – a strategy that Brainard has approved in the past.
Wrightson ICAP LLC chief economist Lou Crandall said Powell should be careful to push back the interest rate expectations baked into the treasury market. The Fed’s next summary of economic projections, which will be published after its policy meeting on March 16 and 17, could show that a growing number of policymakers will point to a rate hike in 2023.
Powell could rather highlight the Fed’s new modus operandi for monetary policy under the framework it adopted last year.
“He could try to draw the market’s attention to the extent to which the Fed’s thinking has changed,” Crandall said.
– Assisted by Craig Torres