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Fed to keep policy easy, stay patient as U.S. economy revives

EconomyFeb 24, 2021 07:15PM ET
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2/2 © Reuters. Senate Banking Committee hearing on Capitol Hill, Washington 2/2

By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) - Amid market expectations the Fed may be forced to tighten monetary policy sooner than expected, top U.S. central bankers delivered a simple message to investors fixated on rising U.S. bond yields and price risks: Do not expect any changes until the economy is clearly improving.

Testifying on Wednesday before the House of Representatives Financial Services Committee, Fed Chair Jerome Powell emphasized the U.S. central bank's promise to get the economy back to full employment, with little worry about inflation unless prices begin rising in a persistent and troubling way.

"We are just being honest about the challenge," Powell told lawmakers when asked about Fed projections that inflation will remain at or below the central bank's 2% target through 2023.

The Fed has said it will not raise interest rates until inflation has exceeded 2% and "we believe we can do it, we believe we will do it. It may take more than three years," Powell said. The current inflation rate by the Fed's preferred measure is about 1.3%.

An expected jump in prices this spring, he said, may reflect post-pandemic supply bottlenecks, or a jump in demand as the economy reopens, but nothing to warrant a policy response.

Powell's remarks led a broad central bank effort to convince the public and particularly bond market investors that it is not going to tighten monetary policy until it is clear people are getting back to work.

Yields on U.S. Treasury bonds have risen recently, with the risk of a potential spike in inflation in focus as the United States expands its coronavirus vaccination program, plans further fiscal spending and moves toward a post-pandemic reopening of the economy.

Financial markets are pricing in a better outlook for the U.S. economy, and "that's appropriate," Fed Vice Chair Richard Clarida told the American Chamber of Commerce in Australia, adding he had become more bullish himself in recent months.

What that does not mean, he said, is any imminent change to the Fed's near-zero setting for short-term interest rates, or its bond-buying program.

"We to a person are going to be patient, we are going to be very careful, and we are going to be very, very transparent of our intentions well in advance of any decision we might make in the future," Clarida said.

Clarida said he sees inflation rising above 2% in the spring but coming back down to about that level by year's end.

Talk about a possible market "taper tantrum" in response to a change in the Fed's bond-buying program is "premature," Clarida said. A taper tantrum refers to a rapid run-up in bond yields based on changes in market expectations for Fed policy.

"We have a deep hole, there's still a ways to go, and I think that settings of monetary policy are entirely appropriate not only now but, given my outlook for the economy, for the rest of the year," he said.

'FRONT-RUNNING THE FED'

While some observers believe the Fed may need to remove crisis-era policies sooner than expected, that argument ignores the Fed's new jobs-first framework, said Tim Duy, chief U.S. economist with SGH Macro Advisors.

"If we try to force the Fed into the old framework, we will be front-running the Fed. The Fed will not validate such front-running," Duy wrote of Powell's appearances this week before House and Senate committees. "The Fed intends to maintain easy policy until the data pushes it in another direction and the Fed does not expect that to happen for a long, long time."

The Fed has said it plans to keep buying $120 billion a month in U.S. government and government-backed securities "until substantial further progress has been made" toward the Fed's maximum employment and inflation goals.

With the inflation target a long way off, Fed officials have focused on what they see as a major gap in the labor market as well - a scar that goes well beyond the 6.3% headline unemployment rate to include concerns about disproportionate joblessness among minorities and the exodus of women from the labor force.

In recent weeks, Powell, Clarida and others have used an alternate measure of around 10% that includes, for example, those who have left the labor force in recent months, and even that may fall short of the damage to workers the Fed hopes to repair.

Powell, who testified in Congress as part of his mandated twice-a-year appearances on Capitol Hill to provide updates on the economy, said the Fed needed to see tangible progress before shifting gears, not just anticipated improvement, and not premature bets from the bond market.

"We are not acting on forecasts," Powell said. The policy "is what it sounds like - incoming actual data that sees us moving closer to our goals."

Fed to keep policy easy, stay patient as U.S. economy revives
 

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Comments (33)
Drupal Grupal
Drupal Grupal Feb 24, 2021 2:57PM ET
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actually, the current bond buying program has become too small for the size of bond market, US economy and overall size of the financial markets. so the bond yield and as a consequence US interest rates at all levels will continue to climb. that hurts US competitiveness.
Ashwani Rastogi
Ashwani Rastogi Feb 24, 2021 2:25PM ET
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Share mkt should be unbiased that's as per law but these *****central banks have made a mockery of this what really they are doing is the easy process to print money and getting back to do something for the economy
Oliver Brecht
Oliver Brecht Feb 24, 2021 2:13PM ET
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simple question, who is buying ?
James Johannsen
James Johannsen Feb 24, 2021 2:07PM ET
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end the fed
Di Ni
Di Ni Feb 24, 2021 2:03PM ET
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this guy is a complete tool, cannot see inflation what almost everyone else is experiencing daily, he should be relieved of his position. incompetent.
oeg vokar
oeg vokar Feb 24, 2021 1:50PM ET
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The guy is just depreciating the dollar... this is what all central banks do, cheap labor, good for corporations.Can't lower rates....Negative rates is bigger stupidity.
Steve Lora
Steve Lora Feb 24, 2021 1:49PM ET
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First of all, i want to thank Donald Trump for leaving an 8 Trillion dollars more in stock market with no inflation. Secondly, I want to than Trump for getting the V curve out of what NBC called "The 2020 Great Depression ". Finally, dont let thos fraud joey F it up.
me ish
me ish Feb 24, 2021 1:43PM ET
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Well, this is bullish for BTC and altcoins - thanks Jerome - the USD will simply continue to go to nothing and what everyone used to call funny money (crypto) will ironically become the most stable and secure money in the world - it cannot be tampered with, it cannot be stolen off you, it can't be shut down unless they shut down the entire internet - I don't think that will work somehow. The Genie is already well out of the bag. Join now and see huge gains, or sit on the sidelines and watch your USD diminish significantly
Matt Kay
Matt Kay Feb 24, 2021 1:43PM ET
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Billionaires will not let this happen.
me ish
me ish Feb 24, 2021 1:30PM ET
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One thing we know for sure about inflation, is that by the time the figures are in to indicate that Powell has met his targets, it's too late and the overshoot will be exponential. Historic data shows this very clearly - he's talking utter *******
Steve Lora
Steve Lora Feb 24, 2021 1:30PM ET
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Jerome is one of the greatest white men of the 21st century
Churn NBurn
ChurnNBurn Feb 24, 2021 1:20PM ET
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One of these days, this whole house of cards is gonna come crumbling down... and of course, the fed is going to look the other way... some heads are gonna roll for sure, yet regrettably they won’t be the real culprits that have created and are propping up this utterly criminal enterprise
Karl Kessler
Karl Kessler Feb 24, 2021 1:20PM ET
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"We could never have seen this coming". Powell is practicing in the mirror for his chance to say the famous Fed phrase, used after every calamity they cause.
VietAnh Tran
VietAnh Tran Feb 24, 2021 1:20PM ET
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Don’t try to make noises because nobody cares just working with the numbers and charts. People who lost normally blame its a house of cards.
Ko Cornel
Ko Cornel Feb 24, 2021 1:15PM ET
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Enjoy the deflationary spiral you are making fool.
Gold Fever
Gold Fever Feb 24, 2021 12:58PM ET
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Remember to teach your children, personal debt bad, government debt good
me ish
me ish Feb 24, 2021 12:58PM ET
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and if you have small bad debts, you're in trouble, if you have huge bad debts, your creditors are in trouble!
Mitchel Pioneer
Mitchel Pioneer Feb 24, 2021 12:52PM ET
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10am sharp, and the criminal fraud resumes in earnest.  After days of mitigated losses, the greatest financial fraud in history, and biggest investment joke in the worlds resume the legalized, financial defiling of America in broad daylight.
Gold Fever
Gold Fever Feb 24, 2021 12:51PM ET
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The pandemic hasn’t worked to justify failed monetary policy, what’s the next catalyst?
Jp Perth
Jp Perth Feb 24, 2021 12:51PM ET
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with all the liquidity created the money sloshing around could on a whim drive up every single critical manufacturing related commodity up 200% in 3 days. Which is exactly what may happen...then this dummy will be fired. I'm afraid we are headed for a massive commodity price spike...stagflation from **** A total disaster.
Karl Kessler
Karl Kessler Feb 24, 2021 12:51PM ET
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Commodities? Everyone knows that you don't need fuel, or lumber, or metals for anything. "There's an app for that!"
me ish
me ish Feb 24, 2021 12:51PM ET
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USD falling, balance of payments widening, no-one apart from FED buying US Treasuries, loads coming due this year with the Chinese and many others staying well clear of buying any more (in fact selling slowly) and commodities, as you say pushing up in a few months, consumer inflation, with a shortage of global chip supply and copper going through the roof, almost everything is going to be more expensive for the US consumer shortly. Add to that shortage of items for sale and a huge surge in spending with free money and people being let out of their homes to celebrate and inflation will be here big time by the end of the year - way past even the FED's false and highly dubious measurement of 2% target rate.
Dave Jones
Dave Jones Feb 24, 2021 12:48PM ET
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120 billion a month with money created out of thin air. How can this not be inflation?
me ish
me ish Feb 24, 2021 12:48PM ET
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buy wheelbarrow manufacturers! (OK, you're going to have to import them from China, as the US probably doesn't make such items, but hey, shipping containers are returning to China empty as there's just one massive one way trade currently with US and China - apart from really cheap crops - you know, that really high tech stuff - GM crops.
Invest Right
Invest Right Feb 24, 2021 12:43PM ET
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Data driven? More like BS-driven.
Zsombor Komán Birtalan
Zsombor Komán Birtalan Feb 24, 2021 12:40PM ET
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He should end up in a jail like his mentor Mr. Trump
Frederick Chotsky
Chotsky Feb 24, 2021 12:40PM ET
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That's a funny comment, because Trump hated him too. There wasn't any mentoring going on.
me ish
me ish Feb 24, 2021 12:40PM ET
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Frederick Chotsky  all Trump's friends end up in hatred - in the end, they all make mistakes or don't toe the lies, so in the end they all end up being slagged off by the BS-in Chief / Russian mafia boss/ Putin puppet.
Jon Bal
Jon Bal Feb 24, 2021 12:40PM ET
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i agree..if you count everything that is not a daily expense inflation is practically zero
Karl Kessler
Karl Kessler Feb 24, 2021 12:40PM ET
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That's the Fed's "preferred" metric. Exclude food, fuel, clothing, shelter and medical expenses.
Loan Pham
Loan Pham Feb 24, 2021 12:40PM ET
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this metric was created during bush father and Clinton eras
me ish
me ish Feb 24, 2021 12:40PM ET
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I think you'll find that fresh air has not gone up in price in the slightest over the last few years, neither has sand, nor seawater - What inflation???
Karl Kessler
Karl Kessler Feb 24, 2021 12:36PM ET
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Pretty cool how the Fed made it look like the pandemic never even existed, isn't it?
Henrik Lindberg
Henrik Feb 24, 2021 12:36PM ET
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More like 30 years
Zsombor Komán Birtalan
Zsombor Komán Birtalan Feb 24, 2021 12:31PM ET
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with this he is saying he will falsify the statistics
Loan Pham
Loan Pham Feb 24, 2021 12:31PM ET
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he did lie. Just the metrics did not measure daily live expenses
irfan ameer
irfan ameer Feb 24, 2021 12:31PM ET
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With this attitude- markets will only go up on speculation
Karl Kessler
Karl Kessler Feb 24, 2021 12:31PM ET
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For a time, yes.
Dark Side of the moon
Dark Side of the moon Feb 24, 2021 12:30PM ET
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hahahaha... now bonds will go down....nice economy based in sayings out of reality...
Michael Song
Michael Song Feb 24, 2021 12:25PM ET
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there is no inflation..it is a communist propaganda:)
 
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