Federal Reserve Jerome Powell testified at a hearing on the Senate Banking Committee on ‘The Quarterly CARES Act Report to Congress’ at Capitol Hill in Washington, USA, December 1, 2020.
Susan Walsh | Reuters
It seems that a booming economy, continuous inflation and a stock market higher are not much of a recipe for easy monetary policy.
But this is the position in which the Federal Reserve finds itself.
The challenge for the central bank is to explain this position to investors and assure them that even if the status quo remains, it will not entice policymakers to change course.
“The basic rule is, ‘Everything looks a little better, but there’s still a lot of uncertainty and we’ll not be doing anything soon. “We’ll probably hear it,” said Bill English, former head of the Fed’s Department of Monetary Affairs and now a professor of finance at the Yale School of Management.
“They do want to suggest that things are better,” he said. “On the other hand, they do not want to suggest that they will change policy any time soon. It is therefore a difficult communication.”
The Federal Open Market Committee, which sets monetary policy, meets Tuesday and Wednesday, followed by a news conference by Fed Chairman Jerome Powell.
Nobody expects broadband changes. Short-term loans will remain near zero, and the Fed will continue to buy at least $ 120 billion a month in bonds to keep markets flowing and keeping financial conditions afloat.
There will be a lot of visits to investors during this meeting.
Economic projections due
Eddie Rodriguez, who works for the city of Hialeah, will be handing out unemployment applications to people in their vehicles on April 8, 2020 in Hialeah, Florida.
Joe Raedle | Getty Images News | Getty Images
For one, individual members will update their forecasts for gross domestic product, unemployment and inflation.
They last presented calculations in December before Congress approved two stimulus packages totaling $ 3 billion and before a Covid-19 vaccine that vaccinated 2.4 million Americans every day.
Goldman Sachs recently raised its GDP forecast to 7% for the full year and also sees unemployment fall faster than expected, while inflationary pressures rise.
In contrast, the Fed’s summary of economic projections in December indicated an average estimate of just 4.2% for GDP, coupled with a forecast of the 5% unemployment rate and core inflation of around 1.8%.
According to Bank of America, there are likely to be ‘significant upward revisions’.
The GDP figure can be increased by “at least” 1.5 percentage points to a range of 5.7% to 6%, while unemployment can be reduced to 4.8% and inflation can be increased to the Fed’s target of 2 %, Bank of America estimated.
The bank’s economic team called in a note this week’s meeting ‘one of the most important events for the Fed in some time’.
Powell “will have to find the right balance” between an optimistic economic outlook and the Fed’s willingness to keep inflation warmer than usual in an effort to ensure employment is broad and includes income, race and gender, Bank or America noted.
Powell could use the opportunity to propose gradual policy adjustments.
“This is likely to be the Fed’s first step in a less accommodating direction, as they want to set the stage for a taper and eventual tightening of policy,” the bank’s note reads.
Hawkish tilt possible
Jerome Powell, Chairman of the US Federal Reserve, speaks on Wednesday, December 16, 2020 during a virtual news conference in Tiskilwa, Illinois, USA.
Daniel Acker | Bloomberg | Getty Images
In recent weeks, markets were speculated that the Fed would adjust its bond purchases to lower longer-term interest rates, which jumped to pre-pandemic levels this year and caused stock market volatility.
Powell pushed the idea back.
Investors will look through the Fed’s dotted line of expectations from individual members on how broad the consensus is for an indefinite unchanged approach.
“Obviously everyone is on board the new framework, but it may not mean the same thing to everyone,” said Tom Graff, head of fixed income at Brown Advisory. ‘It may not mean [some members] is as dull as they just see that this average inflation targeting regime will work differently than Powell might do. ‘
It can therefore be left to the market to determine which policy “dots” are moving after rate hikes. According to Citigroup, the market is already appreciating the possibility of increases at the end of 2022 and three total by the end of 2023. Current Fed estimates are only available for at least 2024.
“This is going to be interesting, because how do you upgrade your GDP forecasts to 7% and your inflation target to 2% and your unemployment forecast to 5% and then say we’re going to be super easy,” Kathy Jones said. chief strategist for fixed income at Charles Schwab. “What they will try to emphasize is patience.”
Jones said she did not yet expect a shift in policy, and Powell stressed the importance of ” such a broad and inclusive increase in employment and a decline in unemployment as possible before even considering raising rates. . ‘
“They’re pretty comfortable waiting for it,” she said.
Engels, the former Fed official and Yale professor, said Powell would emphasize “uncertainty” despite progress with the virus and the economy.
“Part of the communication is that ‘our response function has not changed. We still want to achieve our goals, we will still be patient,'” he said. “The prospects are probably better, but the world is an uncertain place. A lot can happen.”