By Steven K. Beckner
(MaceNews) – Despite mounting signs of economic recovery, Federal Reserve policymakers voted Wednesday to maintain their super loose credit policies, and Chairman Jerome Powell gave no hint the Fed is ready to become less aggressively expansionary.
The Fed’s rate-setting Federal Open Market Committee FOMC did make significant changes in its policy statement, taking note of progress in rebounding from the pandemic and of rising inflation, but Powell repeatedly emphasized the Fed has a long way to go before it meets its “maximum employment” and 2% average inflation goals as he spoke to reporters after the FOMC concluded a two-day meeting.
The FOMC voted unanimously to leave the federal funds rate in a zero to 25 basis point target range and reaffirmed its intention to keep buying $120 billion of bonds per month. (At their March 16-17 meeting, FOMC participants projected that it will remain appropriate to keep the funds rate near the zero lower bound through 2023, despite upgrading their economic forecasts).
Echoing previous policy statements, the FOMC said it wants to “achieve inflation moderately above 2% for some time so that inflation averages 2% over time and longer-term inflation expectations remain well anchored at 2%.” It added that it “expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.”
The FOMC also repeated it “will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
The FOMC did not publish revised economic forecasts and rate projections at the latest meeting, but the policy statement reflects a further brightening of the economic outlook.
“Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement.”
As before, the FOMC said the economy’s path will “depend significantly” on the course of the virus, but, reflecting more pervasive vaccinations and progress in containing the virus, the language was softened. Instead of saying the virus “poses considerable risks to the economic outlook,” the FOMC now simply says “risks to the economic outlook remain.”
The statement also contains important changes to the language on inflation.
In March, the FOMC said, “inflation continues to run below 2%.” Now, in wake of the Labor Department’s report that the consumer price index rose 2.6% and the producer price index 4.2% year-over-year last month, the new policy statement says, “Inflation has risen, largely reflecting transitory factors.”
Although those rhetorical changes could be seen as a tentative step toward eventual “tapering” of asset purchases and subsequent “liftoff” from the zero lower bound, Powell took pains to stress that the Fed remains far from its objectives.
The Fed chief acknowledged the economy has recovered more quickly than expected but said the recovery is “uneven and incomplete.”
Although non-farm payrolls rose nearly a million in March and the unemployment rate fell to 6%, he said 8.4 million are still out of work compared to pre-pandemic levels and said that unemployment rate “understates” the true extent of joblessness.
As for inflation, Powell said it is likely to continue rising due to “base effects,” resurgent demand and supply bottlenecks, but reiterated his long-standing belief that this will prove “transitory.”
So, he declared, “the economy is a long way from our goals likely … . It will take some time for our objectives to be achieved.”
So when asked whether it is time for he and his colleagues to at least start thinking about tapering, he replied bluntly, “No, it is not time yet.”
Powell said the labor market has only begun to recover and that the Fed will need to see “a string” of strong job reports. “One strong month is not enough. We need to see more.”
“It will take some time before we see ‘substantial further progress,” he said, adding, “We’re a long way from full employment.” With 8.4 million still out of work “we’ve got long ways to go.”
Powell was peppered with questions about inflation dangers stemming from the combination of easy monetary policy and unprecedented deficit spending, but he has on many previous occasions he largely dismissed such concerns – repeatedly predicing rising inflation is “likely to be temporary.”
He vowed the Fed would “use our tools” if inflation were to “move persistently and materially above” the 2% target.
“No one should doubt…we are prepared to use our tools,” he asserted.
Powell said it is important that inflation expectations mvoe higher, but said that so far he is not concerned. He said “breakevens are now at levels that are pretty close to mandate consistent … before they were below.”
Powell also pledged again to “communicate well in advance” of any tapering and “let the public know what we’re thinking.”
In other comments, Powell called equity markets “frothy,” but said that, on the whole, financial stability risks are “manageable.”
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Contact this reporter: steve@macenews.com.
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