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Washington (AFP)
Nervous investors have been hesitating between celebrating the expected US economic recovery and the question of a possible price spiral, but the Federal Reserve is holding fast to keeping interest rates low.
In the balance between allowing for faster growth – and rising prices – to restore some of the more than nine million jobs still lost due to the Covid-19 pandemic, the message from Fed Chairman Jerome Powell was clear: he wants to see more people back to work.
Analysts expect the Fed’s Federal Open Market Committee (FOMC) to maintain its rather “dovish” stance when holding its two-day policy meeting next week.
Powell must emphasize once again that the Fed is willing to accept rising inflation to return to full employment, a goal that took a decade to achieve after the 2008 global financial crisis.
“I think it’s ‘markets be damned’ right now,” said Robert Frick, of the Navy Federal Credit Union.
“The Fed said that until the real improvement in jobs and the economy, they are not going to budge,” Frick told AFP. “I really don’t think they will falter.”
From a 50-year low of 3.5% unemployment before pandemic blockades began in early 2020, the unemployment rate skyrocketed when millions of workers were sent home, but gradually dropped to 6.2% in February in the middle to the reopening of companies.
As vaccine launches pick up speed and President Joe Biden signed a massive $ 1.9 trillion stimulus package, increasing the chances of the world’s largest economy reopening soon, investors began to fear an inflationary spiral.
This is reflected in the increase in government debt yields, especially in the 10-year Treasury notes, a canary in the coal mine for the next price increases.
– Hot, but not boiling –
While the jump to the early 2020 level can be seen as a kind of market freak-out, there are real-world consequences of increased Treasury yields, as rates for home mortgage and auto loans are rising. linked to them.
Mortgage rates have started to rise, which could drive some buyers out of a heated housing market, while existing homeowners will have a harder time refinancing their loans, said Oxford Economics’ Kathy Bostjancic.
Inflation is expected to rebound as the economic engine accelerates, especially compared to the depressed prices seen during the close of the pandemic, but any sharp increase should be temporary.
“The reopening of the economy will be fueled by this $ 1.9 trillion fiscal stimulus, so there is no doubt that” inflation will rise, Bostjancic told AFP.
The critical question is how high “and for how long,” she said.
“It will get hotter, but we don’t think it’s an overheating situation.”
In more than a decade, inflation has rarely exceeded the Fed’s 2.0% target, and the central bank’s preferential price measure rose just 1.5% in January, compared to the previous year.
Bostjancic and Frick agree with many economists who say there is too much slack in the economy, which will dampen price increases.
– Sign for the markets –
Powell acknowledged that prices will rise, but he promised that the Fed would not withdraw the stimulus until the economy returned to maximum jobs – which is unlikely this year – and inflation was above the 2.0 percent target and at way to stay there “for awhile.”
“We don’t intend to raise interest rates until we see these conditions satisfied,” said Powell.
However, the Fed is not immune to market tensions and Powell could try to defuse inflation fears by sending a stronger signal that the central bank will use its tools to deal with any worrying price increases or spikes in bond yields.
Although he did not commit to details, he could provide more details at his news conference on Wednesday, including his willingness to change the debt mix the Fed buys each month.
And Bostjancic notes that the Fed could make another technical move that could ease the pressure on yields, extending the pandemic exemption on banks holding Treasury bills without having to have a cash buffer.
This exemption expires at the end of the month.
© 2021 AFP