Fed’s George: Too Soon to Discuss Tapering Bond Buying
Federal Reserve Chairman Jerome Powell signaled that the central bank was nowhere close to pulling back on its support for the pandemic-damaged U.S. economy even as he voiced expectations for a return to more normal, improved activity later this year.
“The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,” he told the Senate Banking Committee Tuesday.
He also played down concerns of an inflationary outbreak from another big fiscal stimulus package or from an unleashing of pent-up demand as a growing number of Americans are vaccinated against the virus. And he called the recent run-up in bond yields that has unsettled the stock market “a statement of confidence” in a robust economic outlook.
The Fed is currently buying US$120 billion of assets per month -- US$80 billion of Treasury securities and US$40 billion of mortgage-backed debt -- and has pledged to keep up that pace “until substantial further progress” has been made toward its goals of maximum employment and 2 per cent inflation.
The chairman “gave absolutely no indication that the Fed is thinking about changing its very dovish policy stance,” Cornerstone Macro analysts Roberto Perli and Benson Durham wrote in a note to clients.
Powell’s testimony occurred against the backdrop of growing optimism about the economy as vaccines against the coronavirus are more widely disseminated and expectations of further fiscal stimulus from President Joe Biden and Congress mount.
Bond yields have risen on the economy’s better prospects and in anticipation of faster inflation. Some traders have also brought forward their expectations for the Fed’s first interest-rate increase since it slashed rates effectively to zero last year.
Powell said it was important to determine what was behind the higher bond yields, namely expectations of a return to a more normal economy.
“In a way, it’s a statement on confidence on the part of markets that we will have a robust and ultimately complete recovery,” he said.
Market price action was volatile in the aftermath of Powell’s opening statement text release, with 10-year yields initially rising a couple of basis points to 1.3875 per cent session highs, before the move quickly faded and yields dropped back lower by about the same amount.
Interest-rate swap markets are pricing the first 25 basis point of Fed hikes around mid-2023, versus the early-2024 time frame priced in at the beginning of this month.
Technology company shares led a decline in U.S. stock prices on Tuesday on concern that valuations had gotten out of hand amid higher bond yields and bets on faster inflation. Even with recent weakness, though, the S&P 500 index is still up more than 70 per cent from lows struck last March.
Powell said he didn’t have an opinion on whether that constituted an equity market bubble, noting that there were opinions expressed on both sides of that proposition. “No one can really identify” a bubble, he said.
Powell allowed that loose monetary policy has played a role in pushing up asset prices. But he said that other forces were also at play, including expectations of faster economic growth.
“While we should not underestimate the challenges we currently face, developments point to an improved outlook for later this year,” Powell said. “In particular, ongoing progress in vaccinations should help speed the return to normal activities.”
In response to a question, the Fed chair said growth could come in this year at 6 per cent. The economy contracted by 2.5 per cent last year.
The economy started 2021 on a strong note, as retail sales and factory output accelerated. In the wake of the firmer data, Bloomberg Economics last week boosted its 2021 growth forecast to 4.6 per cent from 3.5 per cent and said that could rise toward 6 per cent-7 per cent if Biden’s US$1.9 trillion aid package is enacted.
What Bloomberg Economics Says...
Federal Reserve Chair Jerome Powell’s prepared remarks before the Senate Banking Committee showed little if any deviation from the tone of recent public statements. But “no news” is news in and of itself because it shows the Fed to be unwavering in its policy stance, despite rising Treasury yields and an improving tone in much of the economic data.
--Carl Riccadonna and Yelena Shulyatyeva, economists
The jobs market though has softened, with claims filed for unemployment benefits jumping to a four-week high in the most recent reporting period. Payrolls last month barely rose, by 49,000, after a 227,000 decline in December, and while unemployment dropped to 6.3 per cent, that partly reflected more people leaving the workforce.
“The high level of joblessness has been especially severe for lower-wage workers and for African Americans, Hispanics, and other minority groups,” Powell said. “The economic dislocation has upended many lives and created great uncertainty about the future.”
He reiterated the Fed’s pledge to keep short-term interest rates pinned near zero until the labor market has reached maximum employment and inflation has accelerated to 2 per cent -- and is on track to moderately exceed that level for some time.
The personal consumption expenditures price index rose 1.3 per cent in December 2020 from a year earlier, well below the Fed’s 2 per cent inflation target. After stripping out volatile food and energy costs, core inflation clocked in at 1.5 per cent.
“I really do not expect that we’ll be in a situation where inflation rises to troubling levels,” Powell said.
He said inflation will pick up in coming months as current price levels are compared to depressed readings a year ago, when the economy was virtually shut down, but that effect will be temporary.
Prices may also be pushed up later in the year by pent-up demand released as a growing number of Americans get vaccinated against the virus. But he said that the increase in inflation was unlikely to be large or long-lasting.
Some economists, most prominently former Treasury Secretary Lawrence Summers, have warned that Biden’s US$1.9 trillion stimulus plan could lead to an overheating of the economy and much faster inflation -- a concern that administration officials have pushed back on as exaggerated.
While Powell studiously refrained from commenting on the Biden package, he did say that there hasn’t been a strong connection between bigger budget deficits and inflation recently.