Powell Confirms Fed Will Keep Easy Money Policies Until Economic Recovery – Update 2

By Paul Kiernan

WASHINGTON – Federal Reserve Chairman Jerome Powell has reiterated his intention to keep easy money policies in place, but has provided no sign that the central bank will seek to stem a recent rise in Treasury yields, the prompting to increase further.

The shares also sold on Mr. Powell’s remarks Thursday in an interview with the Wall Street Journal Jobs Summit. The appearance came a week after a surge in Treasury yields driven by expectations of stronger economic growth and inflation in the United States this year, among other factors.

“Today we are still a long way from our maximum employment targets and average inflation of 2% over time,” Powell said in the interview on Thursday.

Some analysts said his latest remarks had done little to assuage investor fears about rising bond yields.

“The market was looking for more solace and didn’t get it,” said Krishna Guha, head of global policy and central bank strategy at Evercore ISI. Fed officials “don’t seem particularly concerned about the current level of yields, which in real and nominal terms are significantly higher than they were two weeks ago.”

The yield on the 10-year treasury bill surpassed 1.55% after Mr Powell’s interview – its highest level since before the pandemic – from 1.46% earlier Thursday and 0.92% at the start of the ‘year.

These rates affect many borrowing costs for consumers and businesses. Following the rise in Treasury yields in recent weeks, the average rate on a 30-year fixed-rate mortgage has risen above 3% for the first time since July, Freddie Mac said Thursday. This has started to weigh on requests to buy or refinance homes.

The Dow Jones Industrial Average lost 345.95 points, or 1.11%, to 30,924.14 on Thursday. The S&P 500 lost 51.25 points, or 1.34%, to 3,768.47, the third consecutive session of decline. The Nasdaq Composite lost 274.28 points, or 2.11%, to 12,723.47.

Meanwhile, oil prices rose Thursday after OPEC and a Russian-led coalition of oil producers maintained most of their production cuts, surprising traders who expected the group to increase. its production.

Mr Powell’s remarks came at his last scheduled public event ahead of the Fed policymakers meeting on March 16-17. He said the central bank would keep ultra-low interest rates until its employment and inflation targets are met, and will continue to purchase large assets until “further progress is made. substantial “have been achieved.

Recent data suggests that the labor market is improving, but slowly. The Labor Department said Thursday that claims for unemployment benefits, an indicator of layoffs, rose slightly to 745,000 in the week ended February 27, from 927,000 in early January, but more than three times their pre-pandemic levels. Mr Powell noted that the United States has about 10 million fewer jobs than before the pandemic and said: “It will take some time to get back to peak employment.”

The central bank has kept its overnight federal funds rate close to zero since last March. He has sought to remove long-term rates by buying, since last June, at least $ 120 billion a month in Treasury debt and mortgage-backed securities.

Another factor fueling the recent rise in Treasury yields is the increase in debt issuance by the Treasury Department to finance a growing budget deficit. U.S. federal debt is expected to nearly double to 202 percent of gross domestic product by 2051, the Congressional Budget Office said Thursday.

As bond yields have risen, some investors have started to speculate that the Fed may start shifting its asset purchases or holdings towards longer-term instruments in order to keep borrowing costs low.

Asked about the long-term rate hike on Thursday, Mr Powell said it was “something of note that caught my attention.” But he did not signal any imminent policy response from the central bank.

“I would be concerned about disorderly market conditions or a persistent tightening of financial conditions which threatens the achievement of our goals,” Powell said Thursday. He added that the Fed is considering “a wide range of financial conditions”, rather than just one measure.

“If conditions change significantly, the [Fed’s rate-setting] the committee is ready to use the tools at its disposal to help achieve its objectives, ”said Mr. Powell.

The steady progress in vaccinating people against Covid-19, combined with billions of dollars in fiscal stimulus, has led forecasters to predict a faster-than-expected rebound in economic activity last year. Many market participants also predict that a spending explosion once the economy fully reopens will push inflation above the Fed’s 2% target, a situation that in the past would have resulted in a tightening of monetary policy.

But more than a decade of low inflation led Fed officials last year to swear not to raise interest rates in anticipation of a rapid rise in prices. Mr Powell said last week that the Fed does not plan to raise its benchmark federal funds rate to near zero until three conditions are met: A wide range of statistics indicate the labor market is at At its peak, inflation has hit its 2% target, and forecasters expect inflation to stay at or above that level.

Mr Powell said it was “very unlikely” that the Fed’s maximum employment target would be met this year. But it was less clear as to whether the economy could show enough improvement this year for the Fed to start cutting back on its monthly asset purchases.

“So far I have been able not to reduce it to a time estimate. I mean, it will come, I think, when we can see it,” Mr Powell said, referring to the standard that the Fed wants to respect. before reducing its asset purchases.

–Michael S. Derby contributed to this article.

Write to Paul Kiernan at [email protected]

(END) Dow Jones Newswires

March 04, 2021 18:33 ET (23:33 GMT)

Copyright (c) 2021 Dow Jones & Company, Inc.

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