Jerome Powell, Chairman of the U.S. Federal Reserve, speaks at a press conference following a Federal Open Market Committee (FOMC) meeting in Washington, January 29, 2020.
Andrew Harrer | Bloomberg | Getty Images
The Fed doesn’t expect inflation to pick up again for years, and it is prepared to keep rates at zero even after that.
Shares initially surged after the Fed released its post-meeting statement and latest economic forecast, showing it will keep interest rates at zero until at least 2023, as expected. Stocks gave up on their gains when Fed Chairman Jerome Powell briefed the media and described the Fed’s direction as strong and “mighty.”
“He’s the great and mighty Oz. Investors got duped. They thought that improving the outlook meant something, but when they peeked behind the curtain, they realized that the Fed didn ‘had done nothing and that the market reversed, “said Michael Arone, chief investment officer. strategist at State Street Global Advisors.
Yields on Treasuries edged up after Powell said the Fed plans to keep its asset purchases at current levels for now. Some bond market professionals expected the Fed to increase treasury bill purchases, and Powell did not commit. The 10-year Treasury yield rose to 0.695%.
“We will continue to monitor developments and stand ready to adjust our plans as necessary,” said Powell.
But it was the Fed’s advice that the markets found accommodating. In the Fed’s latest projections, core inflation is expected to remain low and not hit the Fed’s 2% target before 2023. At the same time, the labor market is expected to improve to the point where the unemployment is 4% in 2023, below the long-term rate of 4.1%.
“It’s accommodating – lower rates for longer, higher stocks, a weaker dollar,” said Jon Hill, senior fixed income strategist at BMO. “The Fed says we’re not increasing in 2023, maybe 2024 … What they say is that these are our targets. We expect to have barely met them and even then they do not increase rates. “
Last month, the Fed announced a change in policy, whereby it will now let inflation exceed its target for a period of time before moving on to hike rates. But in the central tendency of the Fed’s forecast, the Fed sees core inflation drop below 2% until 2022. It expects core PCE inflation of 1.3% to 1, 5% this year and 1.6% to 1.8% next year. The pace will reach 1.9% to 2% by 2023.
But AB economist Eric Winograd said Powell may have undermined the conciliatory message he was sending.
He noted that targeting an inflation exceedance for “a certain period of time,” as the statement said, means they are not aiming for a “sustained” exceedance. So how long does it take for “a certain time “if not maintained?” said Winograd. “This imprecision is a problem that the committee will have to resolve to take full advantage of the change in framework. It is no coincidence that the stock market, which was in positive territory, turned negative after the chairman’s comments.”
Powell said the Fed expects inflation to improve.
“This is a very solid forecast and we believe it will be a sustainable direction that will provide significant support to the economy,” he said.
While some Wall Street strategists and investors believe inflation could become a problem, the Fed has said it is more concerned about disinflation.