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, and the only way we can really build the credibility of that is by doing it.”
Tantrums will get his attention, though.
“I would be concerned by disorderly conditions in markets or by a persistent tightening of financial conditions that threaten the achievement of our goals,” he added.
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.
But forecasting a rate increase three years out, as seven Fed officials did, “is highly uncertain,” Powell dryly noted, adding that no one had much experience of predicting how the economy will recovery after a pandemic.