Testifying before the U.S. House Committee on Financial Services, Federal Reserve Chairman Jerome Powell urged lawmakers not to worry about inflation unless prices rise worryingly and persistent.
Between deep wounds in the job market and low inflation, US Federal Reserve Chairman Jerome Powell sent a simple message to investors obsessed with rising US bond yields and price risks: watch the data and don’t expect monetary policy changes the economy is clearly improving.
Testifying before the US Congressional Parliamentary Financial Services Committee, Powell continued to add weight to the US central bank’s promise to return the economy to full employment and not worry about inflation unless prices do start to increase persistently and worryingly.
“We’re just being honest about the challenge,” Powell told lawmakers when asked about the Fed’s projections that inflation will stay at or below the central bank’s 2% target through 2023.
The Fed has said it will not raise interest rates until inflation rises above 2%, and Powell noted, “We think we can do it; we believe that we will do it… it may take more than three years ”.
An expected price hike this spring, he said, could reflect bottlenecks after the pandemic, or increased demand as the economy reopens, but there is no justification for a policy response.
Powell’s remarks are just the latest in a large central bank effort to convince the public, and especially bond investors, that the Fed will not tighten monetary policy until it is clear that people get back to work.
Yields on U.S. Treasuries have risen recently, with the risk of a potential spike in inflation taking center stage as the U.S. expands its coronavirus vaccination program, plans new budget spending, and are heading towards a post-pandemic reopening of the economy.
“ Leading the Fed Forward ”
While some observers believe the Fed may need to remove crisis policies sooner than expected, this argument ignores the Fed’s new framework for jobs first, said Tim Duy, chief U.S. economist at SGH Macro. Advisors.
“If we try to force the Fed into the old framework, we’ll lead the Fed up front. The Fed will not validate such a front, ”Duy wrote of Powell’s appearances this week before House and Senate committees. “The Fed intends to maintain an easy policy until the data pushes it in another direction and the Fed doesn’t expect that to happen for a very, very long time.”
The Fed, for example, said it plans to continue buying $ 120 billion per month in US government and government-backed securities “until further substantial progress has been made” towards the targets. Fed employment and inflation peaks.
With the inflation target far away, Fed officials have also focused on what they see as a major labor market gap – a scar that goes well beyond the overall unemployment rate of 6. , 3% to include concerns about disproportionate unemployment among minorities, and the exodus of women from the workforce.
In recent weeks, Powell and others have used an alternative measure of around 10% that includes, for example, those who have left the workforce in recent months, and even who may not cover damage to workers that the Fed hopes to fix it.
Powell, who testified in Congress this week as part of his twice-yearly mandated appearances on Capitol Hill to provide updates on the economy, said the Fed needs to see tangible progress before shifting gears, not just early improvement, not premature bets. bond market.
“We are not acting on the forecast,” said Powell. Politics “is what it looks like – real data coming in that brings us closer to our goals.”