Fed officials emphasize policy ‘patience’ as outlook improves

US Federal Reserve officials, facing a potential bout of inflation this spring in an economy turbocharged by vaccines and government spending, on Tuesday said they will keep their easy money plans in place nevertheless in hopes of speeding displaced Americans back to work.

A recent rise in US Treasury bond yields seemed to show investors betting the Fed will move sooner than expected to tighten monetary policy as the recovery gains steam and life returns to normal.

But “we are far from reaching our objectives,” Fed Governor Lael Brainard said, ticking off the litany of ways, from 10 million missing jobs to the pandemic-related drop in women’s labour force participation, in which the US job market is still falling short.

Inflation is also beneath the Fed’s two per cent target, and under the central bank’s new approach policymakers want it on track to actually exceed that level “for some time” before taking any action to restrain it.

“For all of those reasons...we have quite a bit of ground to cover,” before raising the target federal funds rate from its current near zero level, Brainard said in comments to the Council on Foreign Relations. “It is appropriate to be patient...Our statement provides very clear guideposts.”

“Our most important virtue will be patience,” San Francisco Fed President Mary Daly said in prepared remarks to the Economic Club of New York. “We will need to continually reassess what the labor market is capable of and avoid preemptively tightening monetary policy before millions of Americans have an opportunity to benefit.”

GROWING OPTIMISM

Optimism over a sharp drop in Covid-19 infections since January, the US approval of a third vaccine against the scourge, and progress toward passage of a $1.9 trillion pandemic relief package in Congress have led many Wall Street economists to upgrade their economic growth expectations for this year.

That in turn has raised alarm over a possible surge in inflation that would force the Fed to tamp it with rate increases used to curb investment and spending.

But even as the outlook has improved and talk of inflation increased, Fed officials have countered that with a uniform message: the blow to the economy from the pandemic was so deep, and the risks of an incomplete recovery so great, they will keep their policy in rescue mode until substantial further progress has been made.

“Our reaction function has changed,” Brainard said, employing a technical phrase referring to the set of economic developments that trigger a central bank response. If in the past worries about inflation might cause the Fed to nip off a recovery, the aim now is the reverse — to allow some inflation risk in hopes of getting more people to work.

“I will be looking for realised progress toward both our employment and inflation goals. I will be looking for indicators that show the progress on employment is broad based,” she said. Tightening policy before those job gains are locked in “risks an unwarranted loss of opportunity for many of the most economically vulnerable Americans.” — Reuters