While the US Federal Reserve is not expected to make any changes to monetary policy at this week’s two-day meeting, what is said afterwards in the post-meeting statement by chair Jay Powell and in the latest economic forecasts will hit markets one way or another.
AMP Chief Economist, Dr Shane Oliver says the Fed will continue to stress that while the outlook has improved the US economy is still a long way from meeting its goals and so it’s too early to consider starting to reduce monetary stimulus.
“Most interest will centre on whether the Fed and Powell push back more aggressively against the rise in bond yields than we have seen this year,“ Dr Oliver wrote at the weekend.
The recent rise in Treasury bond yields has raised fears of a sudden tapering of monetary stimulus and put downward pressure on Wall Street in recent weeks.
The yield on the benchmark 10-year T bond hit 1.642% on Friday, the highest they have been since February of last year.
It was helped higher by optimism around the outlook for the American economy in the wake of President Biden’s address to the nation the night before and his promise to have most Americans vaccinated by mid-year.
Yields also rose after the number of weekly new jobless claims came in lower than expected on Thursday, totalling 712,000 for the week ended March 6, below the 725,000 estimate.
That was down from 754,000 claims the week before. US economists say that though the labour market has been slowly strengthening, many businesses remain under pressure.
379,000 new jobs were created in February but 9.6 million jobs remain lost since the pandemic started having a major impact a year ago.
The Fed chair confirmed his thinking earlier this month in a speech to a New York investment conference.
Powell said that with vaccines rolling out and the government fiscal taps open “there is good reason to think we will make more progress soon” toward the Fed’s goals of maximum employment and 2% sustained inflation.
But “even if that happens it will take substantial time… We want labor markets consistent with our assessment of maximum employment. That means all of the things,” Powell said in reference to hopes for not only a low unemployment rate but wage and job gains that flow to minorities and others often left out of the first stages of an economic rebound.
“I want to be clear about this,” Powell said. Even when conditions do improve, “I expect that we will be patient.”
The Fed now sees inflation as a minimal risk, and has put more weight in its policymaking on achieving – and maintaining – maximum employment, the second of the two goals set for it by Congress.
“We are committed to staying on the playing field until the job is done…there is still a lot of pain out there,” Powell said.
These sentiments will be present in Wednesday’s statement and post meeting media conference from Powell. Just what markets make of it remains to be seen.
There seems to be a lot of difficulty in the markets understanding the message from the Fed (and RBA here).
