Powell’s Press Conference

June 16, 2021

Financial markets exhibited their sharpest movement of the day during the first half of Chairman Powell’s one-hour press conference. Little transpired in that half hour that was particularly illuminating, and so it appears investors were merely responding to the updated forecasts that show the fed funds rate starting to climb out of the cellar in 2023 rather than 2024 and backed up with upwardly revised indications of likely U.S. growth and inflation this year. The forecast revisions merely are stating the reality of a diminishing Covid drag on economic activity and faster momentum building into all sorts of U.S. economic indicators that are happening as a result. To be clear, many analysts prior to today’s FOMC meeting had predicted some kind of signal of a willingness to start tapering sooner than indicated previously.

The second half of the press conference saw more thought-provoking questions and answers, yet paradoxically markets stabilized. On balance over the whole hour, the dollar and 10-year U.S. Treasury yield rose. but equities and the price of gold fell.  In this second half hour, Powell revealed

  • A desire to move away from the concept of an inflection point when officials begin to think about a time when the committee might consider a timetable for tapering.  The point is any exit strategy will be data outcome-based, rather than time-based.
  • Forward guidance will be orderly, methodical, and transparent. When the time comes to consider changes in policy settings, officials will be thinking about the central bank’s bond purchases. An interest rate hike is still far away.
  • The business cycle has unprecedented elements, just as the prior recession was a once-in-a lifetime event. The spike in inflation in 2021 has been idiosyncratic. It’s been far easier to create demand than to build back supply commensurately.
  • Growth will not be so torrid in 2022 as in 2021. For one significant thing, there will be much less fiscal stimulus.
  • The assumption that inflation settles back in 2022 to being consistent with the Fed’s target is widely matched in private U.S. economic forecasts. Given the unusual nature of the current business cycle, there is a risk that inflation could prove stickier on the downside than assumed, but officials view that possibility as not the likeliest scenario.
  • Meantime, officials will rely on indicators of inflation expectations for guidance especially indicators of longer-term price expectations. Labor market trends will also exert a lot of influence over policy, not only because of the central bank’s mandate to promote full employment but also because labor market trends will tell a lot about developments in expected inflation.
  • One questioner wondered if the pandemic might result in a higher neutral interest rate level, a possibility that Powell didn’t dismiss but moreover said monetary officials would welcome. If that were to prove true, central banks would have more maneuvering room to respond to business recessions.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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