Jerome Powell is in it to win it despite bond-market inflation fear

Jerome Powell has a goal that is bigger than the bond market’s near term inflation concern.

In perhaps his most forthright press conference since taking the helm of the central bank three years ago, the Federal Reserve chair this week laid out three critical messages for investors who have been prope­lling bond yields higher on the bet inflation would eventually force his Fed to tighten monetary policy faster than it’s been indicating.

Powell’s messages? He’s not unduly concerned by rising yields, control of monetary policy communications resides with him and he’s willing to run the economy hot to help it recover from fallout of Covid-19.

Market rebuff

Asked directly during his Wednesday press conference if he was concerned about the increase in Treasury yields, Powell referred to financial conditions and said they remain “highly accommodative.”

It was a clear signal that he wasn’t going to bother with the emotional swings over inflation risk that’s obsessing investors. Powell has an explicit strategy to reflate the economy and he doesn’t think this is going to be easy after decades of low inflation. Therefore, he wants to see actual data and he isn’t persuaded that inflation inertia — where today’s price changes look a lot like yesterday’s — is about to change.

“The fundamental change in our framework is that we’re not going to act pre-emptively based on forecasts for the most part and we’re going to wait to see actual data,” Powell said. “I think it will take people time to adjust to that and to adjust to that new practice.”

Seizing the signal

Powell repeatedly played down the Fed’s quarterly Summary of Economic Projections. “The SEP is not a committee forecast. It’s not something we sit around and debate and discuss and approve,” he said, noting that the dot plot of interest-rate forecasts submitted by each of the Fed’s 18 policy makers was “not meant to actually be a promise or even a prediction of when the committee will act.” The forecasts display a policy response, if other assumptions made by individual officials turn out as expected.

Bringing the heat

A third message came in the forec­asts and how they will respond to unemployment. Taken together, the median of the combined outlooks showed inflation pushing a bit above 2 per cent this year but falling closer to the target in 2022 and 2023. Economic growth roars ahead in 2021 thanks in part to fiscal policy, surging 6.5 per cent and staying above the committee’s equilibrium growth rate of 1.8 per cent for the next two years.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor