Fed’s Opening Two Sentences Could Signal Its Shift

Heading into this Federal Open Market Committee decision, most central-bank watchers knew that Federal Reserve Chair Jerome Powell and his colleagues would do little to rock the boat. Indeed, as expected, they left the fed funds rate unchanged in a range of 0% to 0.25% and left its asset purchases at $120 billion a month after their two-day meeting.

The Fed’s statement struck a delicate balance between optimism over the pace of vaccinations in the U.S. and dismay that so many Americans remain out of work. Policy makers in March described the Covid-19 health crisis as posing “considerable risks to the economic outlook.” On Wednesday, they seemed to scale back the pandemic’s implications for the world’s largest economy, noting only that “risks to the economic outlook remain.”

Rather than parse these minor changes in wording, however, my fellow Bloomberg Opinion columnist Conor Sen smartly drew attention to a part of the statement that remained identical. That would be the first two lines:

“The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world.”

In fact, aside from a minor shift to calling it “the COVID-19 pandemic” instead of “the coronavirus outbreak” starting in September, this language has opened each FOMC statement since the decision on April 29, 2020. This shouldn’t come as a surprise — the health crisis has dominated the lives of Americans for more than a year, and, by extension, it has impacted just about every part of the economy.

However, a lot has changed over the past 12 months. At the highest level, the U.S. unemployment rate was 14.8% in April 2020; it was 6% as of last month. The Fed’s preferred inflation gauge dropped to 0.9% in April 2020; analysts expect it will reach 1.8% when March’s figure is released on Friday. Just this week, the U.S. Centers for Disease Control and Prevention said that fully vaccinated people can forgo masks in some outdoor settings, one visible sign that America is turning the final corner of the pandemic.

Some of the first questions Powell fielded from reporters centered on how the central bank was thinking about the virus at this point. “We haven’t articulated a separate test for a state of the virus that we’d like to achieve because we’re not experts in that area,” Powell said during his press conference. “My guess is that it’s very likely that for us to achieve the economic outcomes we would need to taper or to raise interest rates, we would also have to have made very substantial progress in getting the virus under control. Not necessarily fully under control — there is a possibility of course that we’ll have ongoing outbreaks.”

This response, with a notable echo of the substantial progress test applied to the coronavirus, seems to suggest that those first two lines of the Fed’s policy statement will serve as some sort of indication of when the Fed is ready to start pivoting toward a discussion of tapering its asset purchases. At some point — let’s hope sooner rather than later — framing the Covid-19 pandemic as continuing to cause “tremendous human and economic hardship” will be too alarmist to come out of the world’s most powerful central bank. That’s not meant in any way to diminish the tragic number of lives lost or businesses closed over the past year, but the central bank’s job is ultimately to look forward.

“The Fed is far more concerned about the virus than the average American,” Neil Dutta, head of economics at Renaissance Macro Research, wrote after these comments. “Jay Powell is the guy that shows up in your Instagram feed sharing stories about how bad the pandemic still is while you are back to sharing photos of your beach vacation. Investors should act accordingly.”

All this hammers home the point that the Fed will be patient before considering its timeline for tapering its bond buying. Given that Treasury yields barely budged after Wednesday’s decision, it seems as if the consensus expectation that policy makers will pivot sometime between June and September remains intact. Powell addressed the question of defining a “string” by saying simply it’s more than one good jobs report. He reiterated that the Fed remains a long way from its goals while noting that it doesn’t have to get all the way to its targets before starting to pull back on its asset purchases.

As Powell made clear, the economy and the coronavirus are inextricably linked. Rather than try to determine whether inflation is truly “transitory” or just how many more Americans must reenter the labor force to jolt the Fed into action, it might be easier for bond traders to watch its tone on Covid-19 instead. That starts at the very top of its statement.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

©2021 Bloomberg L.P.

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