Federal Reserve Chairman Jerome Powell on Wednesday stated unequivocally that it was not time yet to talk about taking the central bank’s foot off the gas pedal with interest-rate policy.
With the U.S. economy growing at a 6.4% annualrate in the first quarter and economists expecting the government to report employers added one million jobs in April, it begs the question. When will be time?
The first step towards a more neutral policy from the Fed will be slowing down, or “tapering,” its $120 billion per month in asset purchases. The Fed has said it wants to see “substantial further progress” on its goals on full employment and stable 2% average inflation over the long run before it takes that step.
After Powell’s press conference on Wednesday, economists have settled on late summer – at the Fed’s Jackson Hole conference traditionally held in late August- as the potential date for Powell to make the case for tapering.
Roberto Perl, a former Fed staffer and now an analyst at Cornerstone Macro, said he thought Powell essentially ruled out any taper announcement at the next Fed meeting on June 15-16.
“He didn’t give any indication to me that they were itching to taper,” Perli said.
“While some Fed officials may want to more openly discuss tapering by the June FOMC meeting, it is likely to take Fed leadership until later in the summer to reach that point,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.
“Powell’s Jackson Hole appearance in August is setting up to potentially be a pivotal one,” agreed Steve Stanley, chief economist at Amherst Pierpont Securities.
“The logic is that by August the economy will have added back the bulk of the jobs lost during the pandemic, and as a result the Fed will be close enough to its full employment target that it will be ready to taper,” said Steven Ricchiuto, U.S. chief economist at Mizuho Securities.
Powell has pledged to give advanced warning of any move to taper.
So, under this Jackson Hole scenario, the first reduction in the $120 billion in monthly purchases might happen in early 2022.
And if the Fed moves “gradually” to reduce the purchases, they won’t be done until the end of next year.
Perli said market prices and survey results show investors see even earlier liftoff, with the first interest rate hike in 2022 and multiple rate hikes in 2023.
The Fed’s own forecast shows no rate hikes until at least 2024.
At his press conference, Powell downplayed concerns about inflation, saying while there may be some upward pressure on prices, these will be one time gains, Powell said.
“One-time price increases as the economy reopens are not the same thing as – and is not likely to lead to persistently higher year -over-year inflation into the future,” Powell said.
The Fed’s new average-inflation target framework aims to achieve inflation “moderately above” 2% for some time.
But Perli said his clients talk about little else but higher inflation.
“The market is pricing in the Fed behaving the way it always did. The new framework is just a lot of nice words, but in the end the Fed will not follow it,” Perli said.
The yield on the 10-year Treasury note
rose 4.4 basis point to 1.667%.