Federal Reserve Chairman Jerome Powell assured reporters and lawmakers on Feb. 23 that the Fed will continue its easy monetary policy to spur the economy back to life as the U.S. continues its face-off against the coronavirus pandemic.
Powell defended the central bank’s actions to members of the Senate Banking Committee on Feb. 23. He has repeated this statement multiple times in recent weeks.
“The economy is a long way from our employment and inflation goals,” he said in his testimony.
While COVID-19 cases are broadly down and other indicators such as home sales and retail sales show a positive uptick in the economy, the Fed has not yet pivoted its policy stance.
ING Group analysts Padhraic Garvey, Benjamin Schroeder, and Antoine Bouvet said in a Feb. 23 note that there was little to be surprised about in Powell’s testimony.
“The message to rates markets is clear: it is too early to discuss asset purchase tapering, let alone raising rates. Yet both are being priced with an increasing degree of conviction in rates markets.” they wrote.
In his Feb. 24 testimony to the House Financial Services Committee, Powell said inflation was “soft” and said that “inflation dynamics do change over time” but that they “don’t change on a dime.” Inflation has become a rising force that many are fearing will plague the markets in the coming months.
In both testimonies, little was said on Treasury yields, the total amount of money one can earn by owning U.S. Treasury bills, which also serve as a benchmark for economist and policymaker sentiment on the economy’s status.
“There will also be a concern within the Fed that if it continues and threatens to become disorderly, it could have an adverse impact on the economy and financial markets more broadly,” ING’s chief economist James Knightley said regarding a recent rise in Treasury yields from a Feb. 23 note.
In its first meeting of 2021, Powell said the Fed would continue to hold interest rates – the rate which allows depository institutions to lend to other depository institutions – near zero. He also stressed that the pandemic and economic downturn have not fallen equally on all Americans.
“The high level of joblessness has been especially severe for lower-wage workers in the service sector, and for African Americans and Hispanics,” he said.
The Federal Open Market Committee (FOMC) said last month it would continue to increase its holdings of U.S. Treasury securities by at least $80 billion and mortgage-backed securities by at least $40 billion. The Fed’s quantitative easing efforts have been in full throttle since last March. With interest rates near zero, there is little room left to cut them further for increased stimulus.
