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Photographer: Samuel Corum / Bloomberg
Photographer: Samuel Corum / Bloomberg
Federal Reserve Chairman Jerome Powell will likely seek to convince suddenly skeptical financial markets on Thursday that the central bank will be ultra-patient in withdrawing support for the economy after the pandemic ends.
Rather than trying to cap the long-term interest rate hike, Fed watchers expect Powell to use his appearance at a Wall Street Journal webinar to reaffirm the Fed’s determination to achieve his revamped employment and inflation targets by keeping monetary policy looser longer and clearer that he would like to avoid a repeat of last week’s messy bond market.
“It’s not about trying to disparage the market,” said Michael Feroli, chief US economist at JPMorgan Chase & Co. “But you want interest rates to be aligned with the Fed’s targets. . “
It is important for the long term health of the economy. If the markets and the Fed are in sync, they will work together to meet the central bank’s goals of maximum employment and average inflation of 2% under its new policy framework.
Long-term interest rates have climbed this year – the yield on the 10-year Treasury note was 1.48% at 4:50 p.m. in New York on Wednesday, down from less than 1% at the start of 2021 – due to A more widespread dissemination of vaccines to fight the virus and the promise of increased public spending have raised expectations of much faster economic growth to come.
Brainard’s patient
In what was potentially a preview of Powell’s remarks, Gov. Lael Brainard pointed out on Tuesday how far the Fed was from meeting its targets.
“We have a long way to go,” she said. told a Council on Foreign Relations webinar. “You have to be patient.”
Brainard said the speed of last week’s moves in the bond market had “caught my attention,” adding that she would be concerned if she saw disorderly transactions, or a persistent tightening in financial conditions, which could slow progress towards the Fed’s goals.
In testimony to Congress on February 23-24, Powell played down fears that rising yields would hurt the economy, instead saying at one point that it was a “statement of confidence” in the economy. perspectives.
Read more: ‘Dude, come back to your desk’: the week that rocked the bond markets
Markets exploded the next day, with the yield on 10-year Treasuries briefly hitting 1.6%.
Investors also advanced their expectations for the Fed’s first rate hike in early 2023, as they began to question the central bank’s commitment to maintain easy policy until inflation hit. exceeds 2%.
“The start of 2023 seems pretty early to me,” said Goldman Sachs group chief economist Jan Hatzius, who doesn’t expect a hike until 2024.
PGIM Fixed Income chief economist Nathan Sheets said it wouldn’t be the last time the Fed faced escalating long-term interest rates. He sees the 10-year yield climb to 2% during the summer before declining by the end of the year.
The Fed has a number of ways to fight rising yields if it deems it necessary.
Watch: Danielle DiMartino Booth, CEO of Quill Intelligence, discusses last week’s chaotic T-bill sell-off, economic outlook and Fed policy.
Guidance Lite
First will come more words. Call it forward guidance lite.
The central bank currently buys $ 120 billion in assets per month – $ 80 billion in treasury securities and $ 40 billion in mortgages – and is committed to maintaining that pace “until further progress is made. substantial ”have been achieved towards its objectives.
To help anchor returns, policymakers could become more explicit about when to start cutting back. Fed Vice Chairman Richard Clarida took a step in that direction last week, suggesting the current pace of buying would be appropriate for the remainder of 2021.
Policymakers could also be more specific about what it takes to raise interest rates. They said they would keep rates close to zero until the labor market reaches its employment peak and inflation hits 2% and is on track to moderately exceed that level for some time. But these thresholds are somewhat amorphous and subject to interpretation.
After the words, would come the action. The Fed could step up its bond buying program or shift purchases of mortgage-backed securities to Treasuries.
Operation Twist
Another option: a resumption of Operation Twist, in which the Fed eliminates its holdings of Treasury bills and places the money in longer-term securities. This would have the added benefit of easing downward pressure on billing rates, which threaten to turn negative.
The Fed could also emulate its Australian counterpart and adopt yield curve control, seeking to cap short-term Treasury yields – a strategy Brainard has endorsed in the past.
Wrightson ICAP LLC chief economist Lou Crandall said Powell had to be careful not to push back baked interest rate expectations in the Treasury market. The Fed’s next summary of economic projections, which will be released after its March 16-17 policy meeting, may show a growing number of policymakers are considering a rate hike in 2023.
Instead, Powell could point to the Fed’s new modus operandi for monetary policy in the framework it adopted last year.
“He could try to focus the market’s attention on the degree of regime change in the Fed’s thinking,” Crandall said.
– With help from Craig Torres
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