Federal Reserve Chairman Jay Powell told Congress the drop in coronavirus cases and the vaccine rollout offered “hope for a return to more normal conditions” later this year, indicating potential prospects brighter for the US economy.
In testimony prepared for a hearing before the Senate Banking Committee on Tuesday, Powell offered one of his most optimistic assessments of economic conditions since the start of the pandemic.
However, he warned that there was still a lot of uncertainty and did not signal any changes in the Fed’s super-easy monetary policy.
“In recent weeks, the number of new cases and hospitalizations has declined, and ongoing vaccinations offer hope for a return to more normal conditions later this year. However, the economic recovery remains uneven and far from complete, and the way forward is very uncertain, ”the Fed chairman said in his written remarks.
“While we should not underestimate the challenges we are currently facing, the developments indicate an improving outlook for later this year,” he added.
The prospect of an improvement in the Covid-19 situation in the United States – combined with another large-scale fiscal stimulus backed by Congressional Democrats and US President Joe Biden – has prompted many economists to revise their forecasts for growth for 2021.
Some economists have warned that a boom in economic activity could trigger an unhealthy rise in inflation, forcing the Fed to start tightening monetary policy sooner and more sharply than expected.
However, Fed officials played down the threat of a price spike, saying it was unlikely to continue. They also highlighted slack capacity in the labor market, with nearly 10 million fewer Americans employed compared to a year ago.
The Fed has said it will not raise interest rates from their current near zero level until it reaches full employment, inflation hits 2 percent and is “on the safe side”. the right way ”to exceed this target. He also said he would not start ending his bond buying program until “substantial further progress” was made towards his goals.
“The economy is far from our targets for jobs and inflation, and it will probably take time for substantial progress to be made. We will continue to clearly communicate our assessment of progress towards our goals well in advance of any change in the pace of procurement, ”said Powell.
Financial markets have already started to take into account a more favorable outlook. A liquidation of US government bonds accelerated sharply last week. Yields on the 10-year benchmark are 1.37% on Tuesday.
Inflation-adjusted T-bill yields have also skyrocketed, raising concern among investors that a too rapid rise could shake risky assets and threaten Wall Street’s record run.
“It’s really not absolute return [levels] that would be concerning, it’s more the speed of movement, ”said Anders Persson, director of fixed income investments at Nuveen, adding that a 0.5 to 0.75 percentage point increase in Treasury yields to 10 years over a short period could “scare” investors.
Eric Stein, director of fixed income investments at Eaton Vance, said the Fed would likely monitor fluctuations in the Treasury closely, especially if it results in tighter financial conditions that disrupt the flow of credit to businesses and consumers. .
“Several weeks like [last] week, and the Fed might start to worry, ”he said.
On inflation, Powell pointed out that persistent low inflation was more important an economic factor than the possibility of higher inflation.
“Following sharp declines in the spring, consumer prices partially rebounded from the rest of last year. However, for some of the sectors hardest hit by the pandemic, prices remain particularly low. Overall, on a 12-month basis, inflation remains below our long-term 2% target, ”said the Fed chairman.
“Well anchored inflation expectations strengthen our ability to meet our employment and inflation targets, especially in the current low interest rate environment, in which our primary policy tool is likely to be more frequently constrained by the lower bound, ”he added.