Jerome Powell Says Better Outlook Reflects Vaccine Progress, Fiscal Aid

Federal Reserve Chair Jerome Powell​ said the U.S. central bank would wait until the economy has “all but fully recovered” to pull back the extraordinary monetary support it rolled out in response to the Covid-19 pandemic.

“As we make substantial further progress toward our goals, we’ll gradually roll back the amount of Treasury and mortgage-backed securities we’re buying. And then in the longer run, we’ve set out a test that will enable us to raise interest rates,” Powell said Thursday in an interview on National Public Radio’s Morning Edition show.

“So, we will -- very, very gradually, over time, and with great transparency, when the economy has all but fully recovered -- we will be pulling back the support that we provided during emergency times,” Powell said.

Jerome Powell Says Better Outlook Reflects Vaccine Progress, Fiscal Aid

Data released later on Thursday showed applications for U.S. unemployment benefits fell to the lowest in a year in the week ended March 20, signaling improvement for the labor market as vaccinations accelerate and business restrictions ease in many states.

The Fed chief and his colleagues on the central bank’s policy-setting Federal Open Market Committee held interest rates near zero at the conclusion of their policy meeting last week and reiterated guidance that they would maintain their massive bond-buying campaign at a $120 billion monthly pace until “substantial further progress” had been achieved on their goals for employment and inflation.

Longer-term interest rates have been on the rise since Democrats won control of the Senate in January as investors have speculated that the Fed’s timeline for withdrawal of stimulus may be pulled forward, thanks in large part to the $1.9 trillion relief package recently signed into law.

Powell, in his fourth time speaking publicly this week, said during the NPR interview that upgraded economic projections published following last week’s meeting reflected an acceleration in vaccinations against Covid-19 and the historic fiscal support from Washington.

Robust Recovery

The projections showed Fed officials expect economic growth of 6.5% in 2021, which would mark the fastest annual pace of expansion since 1983. They also revealed that seven of 18 FOMC participants expected it would be appropriate to begin raising rates by the end of 2023 -- up from five in December, when the last round of projections was published.

“We’ve seen something like 85 million Americans have now had at least one shot. Daily shots are running at 2.5 million. And that’s going to enable us to reopen the economy sooner than might have been expected,” Powell said.

“The amount of fiscal support the economy has received is historically large, and that’s going to result in higher economic activity and hiring,” he said. “I’d want Congress to get the bulk of the credit here.”

Liftoff Conditions

The FOMC’s latest policy statement says it won’t begin raising rates “until labor-market conditions have reached levels consistent with the committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.”

Powell nodded to that guidance Thursday during the NPR interview when asked whether all of the money the Fed and Congress have pumped into the economy to counter the effects of the pandemic would result in higher inflation.

“We are strongly committed to inflation that averages 2% over time,” he said. “If it were to be higher or lower than that, then we’d use our tools to move inflation back to 2%.”

Market Optimism

Echoing that sentiment, Fed Vice Chair Richard Clarida told a separate event later on Thursday that a temporary increase in price pressures this year would be followed by inflation returning to -- or slightly above -- 2% in 2022 and 2023. He also played down concerns of economic overheating or financial markets becoming too frothy.

“At this stage of the cycle, given the hole in the labor market, supportive financial conditions are an important source of support,” he said in response to a question after giving a virtual speech to the Institute of International Finance.

“Markets are forward-looking and my interpretation of asset valuations and liquidity and capital and leverage right now is that they are broadly consistent with the baseline view of a very robust recovery, ample fiscal support, successful vaccinations.”

Clarida also said the increase in bond yields is responding to positive developments.

“I interpret the rise in yields since last summer as reflecting several factors. Optimism about recovery, about vaccines, about fiscal support, and about the Fed’s ability to get inflation to 2% and keep it there,” he said.

Temporary Spikes

Chicago Fed President Charles Evans, speaking elsewhere Thursday, said he was optimistic that the U.S. would make substantial progress on employment this year, though he expressed more concern about inflation.

“I think that we’re going to see some transitory increases in prices because of supply-chain bottlenecks and things like that, but I think that’s going to be temporary. So, I think that by 2022 we’re still going to be struggling to get inflation to 2%,” Evans said. “I suspect that it might be 2024 before we actually raise our interest-rate target.”

Addressing an online gathering hosted by the Economic Club of New York, Atlanta Fed President Raphael Bostic said the U.S. isn’t “staring down a fearsome inflation outbreak.”

“Coming off very low measures a year ago, this is likely to produce a big, but not especially meaningful, spike in inflation readings over the next few months,” he said. “On balance, I don’t think it is clear that a surge in underlying inflation is imminent.”

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