Federal Reserve Chairman Jerome Powell was front and center over the past week, speaking at an International Monetary Fund event on Thursday and sitting down for a television interview that aired Sunday night.
His buzzword of choice on TV was that the US economy is at an “inflection point,” meaning the outlook has brightened, but there are still risks. At the IMF event, Powell said the US jobs gain of 916,000 in March was great but he wants to see a string of million-job gains over many months.
Cleveland Fed chief Loretta Mester—normally a reliable hawk—echoed this dovish sentiment on the job gains. “It was great to see that report,” she told a television interviewer. “We need more of them coming our way.”
Neel Kashkari, head of the Minneapolis Fed, was more in character as a dove when he warned in a virtual event for the Economic Club of New York that virus variants pose a big risk as their spread could lead to further closures. He added that he would not even be upset by a 4% inflation rate, depending on what was causing it.
Outcomes Not Outlook
Fed policymakers have stressed in recent weeks that they are committed to maintaining monetary accommodation—near-zero interest rates and $120 billion in monthly asset purchases—until the economy reaches a maximum, broad-based employment level.
In short, the Fed has a vested interest in dampening optimism even as market participants expect a roaring economy and a significant uptick in inflation.
Fed Governor Lael Brainard was busy dampening optimism when she said on CNBC that policymakers are focused on “outcomes,” not outlook.
“Brighter outlook, but of course our monetary policy forward guidance is premised on outcomes not the outlook, and so it is going to be some time before both employment and inflation have achieved the kinds of outcomes that are in that forward guidance.”
But even the conservative economists at the OECD recently doubled their forecasts for U.S. GDP growth this year, to 6.5% from the 3.2% they forecast in December. That would be the highest growth rate for the country since 1984.
The IMF chimed in last week with a similar 6.4% growth forecast for the U.S. Unemployment could fall from 8.1% last year to 5.8% this year and 4.1% next year, the Fund projected.
In the face of this expert economic opinion, investors might be excused for viewing the Fed’s discouraging words with skepticism, if not cynicism.
Recent comments from policymakers echo the sentiments in the March meeting of Federal Open Market Committee minutes released last week, which also were at pains to dampen overweening optimism even as everyone seems to be predicting a strong rebound. As the minutes said:
“Despite these positive indicators and an improved public health situation, participants agreed that the economy remained far from the committee’s longer-run goals and that the path ahead remained highly uncertain, with the pandemic continuing to pose considerable risks to the outlook.”
And Powell cautioned in his IMF remarks that the rollout of the COVID-19 vaccines is proceeding at an uneven pace around the world and this will impact how quickly the global economy can recover.
“Until the world, really, is vaccinated, we’re all going to be at risk of new mutations and we won’t be able to really resume activity with confidence all around the world,” he said.
In the past, the Fed has tended to emphasize it is not responsible for the world economy, but orients its policy to what’s going on in this country. That has apparently changed along with the increased tolerance for inflation. Fed policymakers are dabbling in public health policy, socioeconomic justice, income inequality, and other concerns that might seem outside their monetary policy remit.
The Fed minutes downplayed worries on inflation. The rise in Treasury yields—evident via the 10-year benchmark—that have made investors uneasy is not due to expectations about inflation or Fed interest rates, the minutes say, but reflect rising term premiums driven by other forces, such as trillions in fiscal stimulus and the additional borrowing that entails.
“Higher term premiums could reflect the outlook for more expansive fiscal policy and an associated upward revision in the expected path for Treasury debt outstanding,” the minutes note.
In what could be a direct quote from Brainard herself, the minutes say communications with the public should point out that monetary policy is related to actual progress:
“In particular, various participants noted that changes in the path of policy should be based primarily on observed outcomes rather than forecasts.”