Markets Apr 29

Fed upgrades forecasts without alarming bond market

The Federal Reserve upgraded its economic prognosis but a pledge to delay any policy changes helped to hold down Treasury yields

Fed upgrades forecasts without alarming bond market
Fed chair Jerome Powell is upgrading economic growth forecasts without alarming bond markets for now, as Treasury yields hold down. File picture: Reuters

(ATF) The Federal Reserve gave a positive economic forecast after its policy meeting concluded on Wednesday April 28, but a commitment to freeze rates and keep bond buying unchanged held down Treasury yields, with the benchmark 10-year bond easing to 1.61%. Stocks were barely changed.

“It is not time yet” to begin discussing any change in policy, Fed Chair Jerome Powell told reporters after the release of a statement leaving rates and bond purchase commitments unchanged.

“We are 8.5 million jobs below February 2020,” Powell said. “We are a long way from our goals.. It is going to take some time.”

Powell said that coming price increases would likely be temporary, and should not present the sort of persistent inflation that would force the Fed to begin raising interest rates sooner than expected.

The central bank wants to keep monetary policy loose for the foreseeable future even as it sees the economic recovery gaining pace and the risks from the pandemic starting to ebb.

The easing of the health crisis and the associated reopening of the economy is pushing the United States towards its strongest economic growth since the 1980s. Washington’s crisis-fighting programmes are continuing to funnel money to businesses and households, boosting personal income and spending.

A speech to Congress by President Biden on Wednesday is pitching new infrastructure and social spending programmes that could add trillions of dollars to the economy in coming years.

“Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened,” the central bank’s policy-setting Federal Open Market Committee (FOMC) said in a unanimous statement, with improvement seen even in the industries hardest hit by the onset of the pandemic.

'Virus risks remain'

The Fed repeated that “the path of the economy will depend significantly on the course of the virus,” but in a less cautious manner than its last statement.

In its statement after the March 16-17 policy meeting, the Fed portrayed the coronavirus as posing “considerable risks to the economic outlook.” On Wednesday it said “risks to the economic outlook remain” because of the virus.

Coupled with the strong language on the economy’s prospects, analysts said the Fed’s tone suggested at least a step towards a discussion about when to wean the economy from crisis-era programmes.

That won’t require the country to reach any particular benchmark in its fight against the spread of Covid-19, Powell said. Though he noted the economy likely would heal only if there was “really significant progress” against the disease, he also said ongoing outbreaks would not necessarily prevent the Fed from changing monetary policy if its economic tests for doing so are met.

“We have not articulated a separate test for the state of the virus that we would like to achieve,” Powell said. “There is a possibility of course that we will have ongoing outbreaks over the summer ... And potentially next winter as well. But we will be looking for substantial further progress towards our goals” on employment and inflation.

The Fed left unchanged the list of conditions for improvements in employment and inflation, first set in December, that must be met before it considers pulling back from the support put in place last year to stem the pandemic’s economic fallout, which includes $120 billion in monthly purchases of government bonds and mortgage-backed securities.

Investors and analysts had expected this week’s Fed meeting would see little if any change to the policy statement, and the reaction in financial markets was muted.

The benchmark S&P 500 index ended the session slightly lower. The dollar weakened against a basket of key currencies.

US job growth has been accelerating and the Fed expects inflation to rise to its 2% target over time, eventually allowing it to trim its bond purchases and raise its target overnight interest rate from the current level near zero.

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