Fed to keep money loose as US economy recovers
US Federal Reserve Chairman Jerome Powell has signalled that the central bank is nowhere close to pulling back on its support for the pandemic-damaged US 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 yesterday.
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 $120bn (€98.7bn) of assets per month – $80bn of Treasury securities and $40bn 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 2pc inflation.
Mr Powell’s testimony occurred against the backdrop of growing optimism about the economy as vaccines are more widely disseminated and expectations of further fiscal stimulus 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.
Mr 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 of 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 Mr Powell’s opening statement text release, with 10-year yields initially rising a couple of basis points to 1.3875pc session highs, before the move quickly faded and yields dropped back by about the same amount.
Interest-rate swap markets are pricing the first 25 basis point of Fed hikes around mid-2023, versus the early2024 time frame priced in at the beginning of this month.
“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 6pc. The US economy contracted by 2.5pc last year.
Bloomberg Economics last week boosted its 2021 growth forecast to 4.6pc from 3.5pc and said that could rise toward 6pc to 7pc if Mr Biden’s $1.9trn aid package is enacted.