Central bank likely will stay patient, Powell says
Federal Reserve Chair Jerome Powell said he and his colleagues have a “high standard” for what full employment means, underscoring that the central bank is likely to be patient in removing its support for the economy.
Powell pointed out that the coronavirus has pushed many people out of the job market and said that “4 percent would be a nice unemployment rate to get to, but it will take more than that to get to maximum employment.” It is unlikely the job market will return to full speed this year, he added, speaking in an online question-and-answer session hosted by The Wall Street Journal.
In fact, Powell’s entire message Thursday centered on how cautious the central bank plans to be in dialing back economic policies — low interest rates and large-scale bond buying — that are meant to help the economy recover from the painful coronavirus shock.
But antsy markets appeared unconvinced: Rates jumped and stocks slumped as Powell spoke. The S&P 500 index, which had been up more than half a percent earlier in the day, fell into negative territory —
eventually closing with its third consecutive day of decline.
Investors have begun to pencil in faster growth and higher inflation in recent weeks, betting that a cocktail of big government spending, widespread vaccinations and rock-bottom interest rates is setting the stage for rapid growth and faster price gains. Market players have begun to speculate that the Fed might lift interest rates earlier than expected, even as the central bank’s top officials pledge patience.
“The message, which he sent very clearly, was lower for longer,” said Subadra Rajappa, head of rates strategy at Société Générale. “It was the market reaction I was quite surprised by.”
Rajappa said investors might have expected Powell to signal that the Fed was prepared to counteract recent market moves — perhaps by shifting toward longer-term bond purchases, among other policy options. He may have disappointed them by declining to tee up such a change.
The yield on the 10-year Treasury note, an important bench mark that influences the cost of borrowing for companies and households alike, crept higher as Powell spoke, eventually reaching 1.54 percent.
Stock indexes fell as that happened. Higher interest rates can weigh on stock prices by making bond investing more comparatively attractive — higher yields can mean higher investment returns for buyers — and by nibbling into corporate profits.
Powell acknowledged Thursday that the Fed is watching the market fluctuations, saying that sharp bond market moves last week were “notable” and caught his attention and that he “would be concerned” by disorderly conditions or a persistent change that makes credit expensive and threatens the Fed’s goals.
He rejected the idea that the central bank was poised to remove its policy support soon, saying at one point that the Fed was committed to “staying on the playing field, with our tools, until the job is really done” and the economy is healed.
“My best guess is that he was trying to push back against the expectations of early rate hikes that have dominated the markets this year,” Roberto Perli, a partner and economist at Cornerstone Macro, said in an email. “What he said was no different from what he said so far, and the market needs something more convincing.”
The central bank is buying $120 billion in government debt and mortgagebacked securities each month, and officials have said that they need to see “substantial further progress” before slowing that pace.
Powell reiterated Thursday that the Fed would communicate “well in advance” when it thinks it is reaching that threshold while declining to put a date on when that might happen.
“There’s reason to think that we’ll begin to make more progress soon,” Powell acknowledged. “But even if that happens, as now seems likely, it will take some time to achieve ‘substantial’ further progress.”
When it comes to lifting shorter-term interest rates, their classic policy tool, officials have been clearer about precisely what they want to accomplish before adjusting their cheap-money stance.
“That’s going to depend entirely upon the path of the economy,” Powell said of the plan for interest rates. He said the country had to get to maximum employment, inflation must sustainably reach 2 percent, and those price gains must be on track to exceed 2 percent for some time.
“Those are the conditions,” he said. “When they arrive, we will consider raising interest rates. We’re not intending to raise interest rates until we see those conditions fulfilled.”
Even as many analysts anticipate higher inflation this year after very weak price increases in 2020, Powell was careful to draw a distinction between a short-term pop and sustained acceleration.
“If we do see what we believe is likely a transitory increase in inflation” then “I expect that we will be patient,” Powell said. “There’s a difference between a one-time surge in prices and ongoing inflation.”
And when it comes to the job market, he pointed out that U.S. employers report 10 million fewer jobs than before the pandemic, leaving a lot of room for a labor rebound. The unemployment rate, which will be updated Friday, stood at 6.3 percent in January — still well above its 3.5 percent rate last year. And that understates the pandemic’s labor market cost, since many people have stopped looking for work and are not counted into the official jobless number.
Initial jobless claims increased last week after a big drop the prior week, the latest report showed, showing that the labor market’s recovery remains rocky for now, although a better performance might lie ahead as vaccines allow the economy to reopen more fully.