Jerome Powell has a goal that is bigger than the bond marketâ€™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 propeÂlling bond yields higher on the bet inflation would eventually force his Fed to tighten monetary policy faster than itâ€™s been indicating.
Powellâ€™s messages? Heâ€™s not unduly concerned by rising yields, control of monetary policy communications resides with him and heâ€™s willing to run the economy hot to help it recover from fallout of Covid-19.
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 â€œhighly accommodative.â€
It was a clear signal that he wasnâ€™t going to bother with the emotional swings over inflation risk thatâ€™s obsessing investors. Powell has an explicit strategy to reflate the economy and he doesnâ€™t think this is going to be easy after decades of low inflation. Therefore, he wants to see actual data and he isnâ€™t persuaded that inflation inertia â€” where todayâ€™s price changes look a lot like yesterdayâ€™s â€” is about to change.
â€œThe fundamental change in our framework is that weâ€™re not going to act pre-emptively based on forecasts for the most part and weâ€™re going to wait to see actual data,â€ Powell said. â€œI think it will take people time to adjust to that and to adjust to that new practice.â€
Seizing the signal
Powell repeatedly played down the Fedâ€™s quarterly Summary of Economic Projections. â€œThe SEP is not a committee forecast. Itâ€™s not something we sit around and debate and discuss and approve,â€ he said, noting that the dot plot of interest-rate forecasts submitted by each of the Fedâ€™s 18 policy makers was â€œnot meant to actually be a promise or even a prediction of when the committee will act.â€ 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 forecÂasts 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 committeeâ€™s equilibrium growth rate of 1.8 per cent for the next two years.