Fed Officials Back Dovish Powell View Despite Brighter Outlook
(Bloomberg) - Jerome Powell's low-key message of an incomplete economic recovery won the day officials met last month. The tapping of the meeting showed a unanimous short-term political outlook.
"Participants noted that it will likely take some time to make significant further progress towards achieving the Committee's Maximum Employment and Price Stability goals," said minutes of the Federal Open Market Committee meeting from 16–16 March 17th, which was released on Wednesday.
Officials left their $ 120 billion monthly asset purchase program unchanged during the meeting, predicting that they would keep policy rates near zero through at least 2023 to help the US economy heal from Covid-19 to support. This is despite the vastly improved growth and employment forecasts, which some investors have bet the Fed will act sooner.
"After the FOMC meeting in March, Chairman Powell said it was not time to talk about rejuvenation," wrote Michael Feroli, chief economist at JPMorgan Chase & Co. in the US, in a statement to customers. "The minutes of the FOMC meeting in March confirmed it, as they barely mentioned the future prospects for the Fed's asset purchase program."
Even with 916,000 new jobs last month, the economy is far from the Fed's goals of maximum employment and sustained inflation of 2%. Still, there is a feeling among some officials that the vaccine proliferation, trillions in funding, and very low interest rates could result in a stronger-than-expected recovery.
"The united front perspective is very deliberate," said Derek Tang, an economist at LH Meyer / Monetary Policy Analytics in Washington. Maintaining this unanimity "depends on future conditions," he said.
Seven out of 18 officials expect the Fed to be in a gradual tightening mode by the end of 2023, according to projections released at the March meeting. Some policymakers are warning investors not to expect the Fed to keep policy on a state of emergency indefinitely.
"I want to say that once it is clear that we are out of the pandemic and the Fed has hit some of these benchmarks that we have set, I would rather say that they should expect us to pull back on some of these exceptional levels of accommodation, ”said Robert Kaplan, president of the Dallas Fed, on Wednesday.
The minutes say Fed officials updated their forecast from January, with real GDP growth expected to exceed potential in 2022 and 2023, "which would lead to a decline in the unemployment rate to historically low levels," because monetary policy was assumed to remain very accommodative. "
It's the kind of hot labor market that Powell has often said he would like to restore, even if he has brushed aside concerns that it could lead to worrying inflation. The broader committee also seemed to agree.
“Participants expected that inflation would likely move in a path consistent with the achievement of the committee’s objectives over time, aided by strong aggregate demand, which participants expected to be partly supported by accommodative money - and fiscal policy is being pursued ", it says in the minutes.
Fed Governor Lael Brainard said in an interview with CNBC after the minutes were released, it was likely that shortages could lead to a temporary spike in inflation. After that, however, it is "more likely that the entrenched inflationary momentum we've seen for more than a decade will take over," she said. The Fed has largely missed its annual inflation target of 2% since it was announced in 2012.
Interest rate futures have priced in the possibility of an interest rate hike in the second half of 2022. Michael Gapen, chief US economist at Barclays in New York, said part of the tension was due to uncertainty in the outlook, versus uncertainty about how the Fed will react to the actual data.
While the markets are forward-looking, Brainard noted that the Fed's policies would depend on results or actual data rather than a forecast of when they would achieve their goals.
"Our monetary policy forecast is based on the results, not the outlook," said Brainard. "We have more than nine million fewer jobs than before Covid."
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