Fed pledges patience, says policy is fitting

Views bond yield run-up as sign of confidence

WASHINGTON • U.S. Federal Reserve Chair Jerome Powell on Thursday repeated his pledge to keep credit loose and flowing until Americans are back to work, rebutting investors who have openly doubted he can stick to that promise once the pandemic passes and the economy surges on its own.

With vaccines rolling out and the government fiscal taps open “there is good reason to think we will make more progress soon” toward the Fed's goals of maximum employment and 2 per cent sustained inflation, Powell told a Wall Street Journal forum.

But “even if that happens it will take substantial time... We want labour markets consistent with our assessment of maximum employment. That means all of the things,” Powell said in reference to hopes for not only a low unemployment rate but wage and job gains that flow to minorities and others often left out of the first stages of an economic rebound.

“I want to be clear about this,” Powell said in anchoring the Fed's promise to keep its near zero interest rates and monthly bondbuying intact. Even if prices jump as anticipated this spring, “I expect that we will be patient,” and not change monetary policies that need to remain supportive until the economy is “very far along the road to recovery,” Powell said.

His comments, likely the last before a press conference on March 17 following the Fed's next policy meeting, set aside concern that a recent rise in U.S. Treasury yields might spell trouble for the Fed as investors push up borrowing costs the central bank wants to keep low for firms and families looking to finance major purchases and investments.

While Powell said the increase was “notable and caught my attention,” he did not consider it a “disorderly” move, or one that pushed long-term rates so high the Fed might have to intervene in markets more forcefully to bring them down, such as by increasing its US$120 billion in monthly bond purchases.

“Our current policy stance is appropriate,” he said.

The yield on the 10-year Treasury note rose another 5 basis points as Powell was speaking and signalled no immediate move was imminent from the Fed to cap the increase. Stocks fell.

“The market is kind of setting up its own narrative,” of a Fed poised to move to hold down bond yields, said Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco. “He didn't push back as strongly against the move that the markets were expecting.”

Some analysts thought Powell in his remarks might nod to the Fed's ability to more aggressively intervene and increase its bondbuying if long-term yields keep rising.

But Powell and other Fed policy-makers have made it clear that rather than viewing the run-up in bond yields — which has taken the benchmark 10-year Treasury yield to levels not seen since before the pandemic — as a sign of potentially damaging inflation expectations, they see it pointing to confidence in a recovery that has not had much effect on the broader financial conditions the Fed is monitoring.

“We don't want to see a persistent tightening in broader financial conditions, that's really the test,” Powell said, and so far that broader context remains healthy.

It is a potential moment of inflection for the U.S. economy. Fifty-million people have been at least partially vaccinated against the coronavirus, the rollout is accelerating, and economic growth is expected to follow. Families are sitting on perhaps US$1.5 trillion in extra savings they may be eager to spend once it is safe.

Add to that a US$1.9 trillion federal spending bill nearing approval in Congress, and economic forecasters expect potentially record-setting U.S. growth this year.

In even the very recent past, that set of circumstances might have led policy-makers to conclude inflation was sure to follow, and move to stay ahead of it by reducing the formidable amount of support currently provided to households and firms.

But the Fed now sees inflation as a minimal risk, and has put more weight on achieving and maintaining maximum employment, the second of the two goals set for it by Congress.

“We are committed to staying on the playing field until the job is done…there is still a lot of pain out there,” Powell said.

SUSAN WALSH / POOL VIA REUTERS FILES Fed Reserve Chair Jerome Powell and other Fed policy-makers have made it clear that rather than viewing the run-up in bond yields as a sign of potentially damaging inflation expectations, they see it pointing to confidence in a recovery that has not had much effect on the broader financial conditions the Fed is monitoring.