The Times Herald (Norristown, PA)

Fed likely to stress continued backing for low rates amid pandemic

- By Christophe­r Rugaber

WASHINGTON » The Federal Reserve this week will likely underscore its commitment to its low-interest rate policies, even as the economy recovers further from the devastatio­n of the pandemic.

Chair Jerome Powell is sure to strike a dovish tone at a news conference after the Fed’s latest policy meeting ends Wednesday. He may, in particular, aim to puncture any speculatio­n that the Fed might soon curtail its aggressive efforts to support the economy, including its bond purchase program that aims to hold down longterm interest rates.

The conditions the Fed has laid down before it would adopt any policy changes aren’t close to being met, so no new actions are expected this week. Still, analysts will scrutinize the Fed’s policy statement and Powell’s comments to reporters to gauge how Fed officials are reacting to recent economic developmen­ts.

Since the Fed last met, in mid-December, there has been some good news. The distributi­on of an effective vaccine has begun and a $900 billion relief package was enacted in late December. President Joe Biden has since proposed another financial support plan — a $1.9 trillion package that will require congressio­nal approval.

In recent months, Powell had repeatedly urged Congress and the White House to provide such stimulus. But he will likely try to avoid sounding overly optimistic about the economy’s prospects for fear of encouragin­g speculatio­n that the Fed will slow or withdraw its support earlier than expected.

“The emphasis will be on, ‘We’re not out of the woods yet,’ ” said Seth Carpenter, an economist at UBS and a former Fed economist.

Some central bank officials have suggested that they might consider withdrawin­g Fed stimulus later this year, earlier than investors generally expect, but Powell contradict­ed that in a public appearance earlier this month. He will likely do so again Wednesday.

Powell also said that the Fed would provide ample notice when it does conclude that it will slow its bond-buying program.

“We will communicat­e very clearly to the public,” he said, “and will do so, by the way, well in advance of active considerat­ion of beginning a gradual taper of asset purchases.”

The Fed wants to avoid a repeat of 2013, when thenchairm­an Ben Bernanke told Congress that the Fed was considerin­g tapering its the bond buys, which caught markets unaware, sharply pushed up longerterm interest rates, and earned the moniker the “taper tantrum.”

Most key economic data have recently been disappoint­ing and show an economy faltering in the face of the still-raging viral pandemic. Since the Fed’s last meeting ended Dec. 16, the government has reported that employers shed jobs last month for the first time since April. And consumers also cut back on retail spending in December for a third straight month.

The Fed has pinned its benchmark short-term interest rate near zero, and it signaled in December that the rate would likely remain there through 2023. It is also buying $80 billion in Treasury bonds and $40 billion in mortgage bonds each month to keep longerterm borrowing rates low. In December, the Fed said it would continue those purchases until “substantia­l further progress” has been reached for low unemployme­nt and stable inflation of about 2% a year.

The prospect of additional stimulus and ongoing vaccinatio­ns has raised concerns that as Americans eventually release pent-up demand for airline tickets, hotel rooms, new clothes and other goods and services, the economy might accelerate and inflation could surge above 2%. If many companies don’t initially have the capacity to meet that demand, prices would pick up. Yet most Fed officials appear unconcerne­d about those trends potentiall­y igniting runaway price increases.

“It’s very difficult to imagine out-of-control inflation,” Charles Evans, president of the Federal Reserve Bank of Chicago, said earlier this month. “I welcome above-2% inflation. Frankly, if we got 3% inflation, that would not be so bad.”

One reason the Fed isn’t expected to raise rates anytime soon is that it adopted a framework last year that calls for inflation to average 2% over time. Given that inflation has mostly languished below that level since the Fed adopted it as a target in 2012, policymake­rs would have to let inflation run above 2% for some time to make up for the years of below-target price increases.

The Fed refers to this framework as “flexible.” It isn’t committing to a time period over which inflation will top 2%. The Fed prefers some inflation to guard against deflation, a destabiliz­ing fall in wages and prices.

As a result, even if hiring picks up and unemployme­nt tumbles later this year as the vaccines curb the virus, economists expect the Fed to stress that it won’t raise rates until inflation actually accelerate­s.

Jim O’Sullivan, an economist at TD Securities, said in a research note that Powell will likely drive that message home Wednesday.

“We expect him to emphasize that inflation will be key to when the Fed’s ‘exit’ (from low rates) begins,” O’Sullivan wrote, “and most Fed officials are skeptical that a few strong quarters for growth will suddenly lead to a meaningful pickup in the trend in inflation.”

 ?? GREG NASH — POOL VIA AP ?? Federal Reserve Chairman Jerome Powell testifies before a House Financial Services Committee hearing on Capitol Hill last month. Powell is expected to quell speculatio­n that the Fed might soon curtail its aggressive efforts to support the economy, including its bond purchase program that aims to hold down long-term interest rates
GREG NASH — POOL VIA AP Federal Reserve Chairman Jerome Powell testifies before a House Financial Services Committee hearing on Capitol Hill last month. Powell is expected to quell speculatio­n that the Fed might soon curtail its aggressive efforts to support the economy, including its bond purchase program that aims to hold down long-term interest rates

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