Jay Powell signalled that the Federal Reserve was still far away from withdrawing support for the US economy, even after the central bank upgraded its view of the recovery.
In a press conference following the conclusion of policymakers’ two-day meeting, the Fed chair affirmed that the US central bank was not yet ready to discuss tapering its massive programme of asset purchases.
“We’ve had one great jobs report, it’s not enough,” Powell said, referring to the latest monthly data which showed the US economy added almost 1m new jobs in March. “We’re going to act on actual data, not our forecast.”
“We’re a long way from our goals,” he added.
Powell’s comments came after members of the Federal Open Market Committee offered a brighter picture than they had in March, but kept interest rates close to zero and debt purchases steady at $120bn a month.
“Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement,” the committee said.
The Fed continued to say that the path of the economy would “depend significantly on the course of the virus” and the public health crisis created “risks” to the economic outlook. However, in March, it had described the pandemic risks as “considerable” — an adjective it removed on Wednesday.
US stocks ended the day flat, but long-dated Treasuries rose as Powell spoke. The yield on the benchmark 10-year Treasury note fell to 1.61 per cent, having traded above 1.65 per cent before the press conference began.
The Fed has set a high bar for starting to reduce the pace of its asset purchases, saying “substantial further progress” would have to be made toward its goals of full employment and 2 per cent inflation on average over time. The US labour market is still 8.4m jobs short of its pre-pandemic employment levels, and while inflation is expected to rise in the coming months, Fed officials do not expect it to be sustained.
In its statement on Wednesday, the central bank acknowledged the higher moves in inflation, but reiterated this “largely” reflected “transitory factors”.
Powell also highlighted so-called base effects, which reflect that prices crashed this time last year as the pandemic intensified, and supply chain constraints, which have emerged as demand has surged alongside the easing of lockdown measures, that will lead to a temporary burst in inflation this year.
“We think of bottlenecks as things that in their nature will be resolved as workers and businesses adapt, and we think of them as not calling for a change in monetary policy since they’re temporary and expected to resolve itself,” Powell said. “We know the base effects will disappear in a few months.”
However, he said the Fed would not hesitate to act if a spike in inflation looked sustained or unhealthy.
“If we see inflation moving materially above 2 per cent in a persistent way that risks inflation expectations drifting up, then we will use our tools to guide inflation and expectations back down to 2 per cent. No one should doubt that we will do that,” he said.
Diane Jaffee, a portfolio manager at the asset manager TCW, commended Powell for being “strong, clear and constant”, and said that the bar for the Fed to budge from its current monetary policy stance had risen.
Jason Thomas, head of global research at the Carlyle Group, reckons Fed policy will be on “autopilot” for at least the next few months, until the inflation outlook becomes more clear.
Despite assurances from Fed officials that they would take a “patient” approach when considering changes to its monetary policy, investors have begun to speculate when the central bank might be compelled to begin withdrawing its support.
Eurodollar futures, a measure of interest rate expectations, now indicate the Fed will raise rates by early 2023, almost a year earlier than suggested by the central bank’s latest forecasts, published in March.