Fed Officials Back Dovish Powell View Despite Brighter Outlook
Fed Saw Some Time Before Taper Conditions Met, Minutes Show
(Bloomberg) -- Federal Reserve Chair Jerome Powell’s dovish message on an incomplete economic recovery won the day when officials met last month, with a record of the gathering showing a unanimous near-term policy outlook.
“Participants noted that it would likely be some time until substantial further progress toward the committee’s maximum-employment and price-stability goals would be realized,” according to minutes from the March 16-17 Federal Open Market Committee meeting published Wednesday.
Officials left their asset purchase program of $120 billion per month unchanged at the meeting and forecast they would keep the benchmark lending rate near zero until at least 2023 to help the U.S. economy heal from Covid-19. That was despite sharply upgrading projections for growth and employment that has had some investors betting the Fed will act sooner.
“After the March FOMC meeting Chair Powell said it wasn’t yet time to start talking about talking about tapering,” JPMorgan Chase & Co. chief U.S. economist Michael Feroli wrote in a note to clients. “The minutes to the March FOMC meeting backed him up, as they barely mentioned future prospects for the Fed’s asset purchase program.”
Even with 916,000 new jobs added to the economy last month, the economy is far from the Fed’s goals of maximum employment and sustainable 2% inflation. Still, there is a sense among some officials that vaccine dissemination, trillions of dollars in fiscal support and very low interest rates could lead to a stronger-than-expected rebound.
“The angle of a united front is very deliberate,” said Derek Tang, an economist at LH Meyer/Monetary Policy Analytics in Washington. Maintaining that unanimity is “dependent on conditions” going forward, he said.
Liftoff Timing
Seven of 18 officials expect the Fed to be in a gradual tightening mode by the end of 2023, according to projections released at the March meeting. Some policy makers are warning investors not to expect the Fed to indefinitely keep policy on an emergency footing.
“I would want to communicate that once it’s clear that we’ve emerged from the pandemic and the Fed has achieved some of these benchmarks we’ve set up, I would rather communicate that they should expect that we will be withdrawing some of this extraordinary level of accommodation,” Dallas Fed President Robert Kaplan said Wednesday.
The minutes said the Fed staff upgraded its forecast from January with real GDP growth expected to exceed potential in 2022 and 2023, “leading to a decline in the unemployment rate to historically low levels, as monetary policy was assumed to remain highly accommodative.”
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It’s the kind of hot labor market that Powell has said many times he would like to restore, even while he has pushed aside concerns that it could generate worrisome inflation. The broader committee also seemed to endorse the view.
“Participants expected that inflation would likely move along a trajectory consistent with achieving the committee’s objectives over time, supported by strong aggregate demand, which participants expected would be driven in part by accommodative monetary and fiscal policies,” the minutes said.
Fed Governor Lael Brainard, in an interview with CNBC after the minutes were released, said it was likely that bottlenecks could result in a temporary lift to inflation. After that, however, it is “more likely that the entrenched inflation dynamics we have seen for well over a decade will take over,” she said. The Fed has mostly missed its annual inflation target of 2% since announcing it in 2012.
Interest-rate futures have been pricing in the possibility of a rate hike in the second half of 2022. Michael Gapen, chief U.S. economist at Barclays in New York, said part of the tension comes from uncertainty in the outlook mapped against uncertainty about how the Fed will respond to actual data.
While markets are forward looking, Brainard noted that the Fed’s policy would hinge on outcomes, or actual data, rather than a forecast of when they would hit their goals.
“Our monetary policy forward guidance is premised on outcomes, not the outlook,” Brainard said. “We are over nine million jobs short of where we were pre-Covid.”
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