At 23:00 on Tuesday, Fed Chair Jerome Powell appeared before the Committee for a hearing to deliver testimony on the semiannual Monetary Policy Report.
Powell began by commenting on the economic path, saying that recent developments suggest that the economic outlook will improve later this year, that ongoing vaccinations offer hope for a return to normalcy later this year, and that the number of new cases and hospitalizations has been declining. As a result the Fed will update its GDP growth forecast for 2021, likely in the 6% range. But the path of economic development still depends heavily on the outbreak and containment measures.
As for the labor market, Powell said the pace of improvement in the labor market has slowed, with the unemployment rate still rising and improvement in job market indicators slowing. Household spending on services remains low, especially in the leisure and hospitality sectors.
In contrast, spending on goods showed encouraging growth in January this year after slowing late last year. The real estate sector has fully recovered from the recession, while business investment and manufacturing production are also picking up.
Labor market progress in many sectors has been affected by major losses in industries such as leisure and hospitality. But Powell particularly stressed that the Fed will not tighten monetary policy just to respond to the strong labor market, and if there is any change in the pace of bond purchases, the Fed will come much earlier to clearly convey the message that now is not the Time to consider the budget deficit.
For the much-anticipated Inflation expectations, Powell said that inflation remains “particularly weak” in hard-hit sectors, and inflation remains below our long-term target of 2%, and reiterated that interest rates will remain close to zero until full employment and inflation rises to 2%, and is expected to moderately exceed 2% over time. On recent signs of elevated inflation including U.S. bond yields, Powell explained.
Inflation data are expected to rise briefly due to base effects, but inflation dynamics will not change instantly and do not see a surge in fiscal support or spending leading to high inflation. As the economy fully recovers, upward pressure on prices may be seen, but it will not have a large or sustained impact. The rise in Treasury yields is due to expectations that inflation and economic growth will recover, but the Fed will be watching a range of indicators that go beyond the level of Treasury yields.
On monetary policy, Powell added.
The Fed’s policy decisions will be based on “employment and the highest level of the difference between how much (shortfalls)” to make, rather than the previously used term deviations (deviations). Good inflation expectations enhance our ability to meet our employment and inflation targets, especially in the current low interest rate environment, where our main policy tools may be constrained more frequently by the interest rate floor.
Powell acknowledged that the new crown Epidemic has been particularly detrimental to low-income workers and minority populations, and that the Fed has not only focused on overall employment data, but has also considered employment data for other groups, but that monetary policy is a broad tool that cannot specifically target low-wage workers and minority workers. But Powell said he would not comment on the Biden administration’s fiscal spending plans.
Powell also mentioned asset markets and argued that there is a link between Fed liquidity and asset prices, and that Fed policy is a factor in making asset prices rise. However, he was undecided on the supplemental leverage ratio.
As Powell took questions from lawmakers, U.S. stocks kept narrowing their losses, with the Nasdaq down 1.6 percent, the Dow now down 0.37 percent and the S&P 500 down 0.63 percent. tesla, which had previously fallen 13%, moved higher in the short term, with shares rising back above $700, now down 1.9%. International oil prices turned higher, with Brent crude futures now at $65.33/barrel and WTI crude futures at $61.8/barrel.
U.S. Treasury yields surged lower, with the benchmark 10-year Treasury yield turning lower at 1.348% 45 minutes after the hearing began, and the dollar index also turned lower, approaching the 90 mark. Spot Gold held above the $1,800 mark, while spot silver narrowed its losses to about 2 percent.
Analyst Chris Anstey commented that when the Fed finally said it would phase out its $120 billion a month bond-buying program, it was a topic of debate among market analysts as to whether it could actually avoid a proper panic in the bond market. Some believe certain disruptions and volatility are inevitable. The Fed’s thinking is that it will send signals in advance designed to avoid any turmoil.
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