Jerome Powell, chairman of the US Federal Reserve, speaks during a press conference following a meeting of the Federal Open Market Committee (FOMC) in Washington, Jan.29, 2020.
Andrew Harrer | Bloomberg | Getty Images
The Fed hasn’t expected inflation to pick up in years, and is willing to keep rates at zero after that.
Shares initially rose after the Fed released its post-meeting statement and latest economic forecast, showing that it will keep interest rates at zero until at least 2023, as expected. The shares gave up their gains when Fed Chairman Jerome Powell briefed the media and described the Fed̵
“He’s the great and mighty Oz. Investors have been fooled. They thought advanced driving forward meant something, but when they peeked behind the scenes they realized that the Fed did nothing and the market reversed.” said Michael Arone, chief investment strategist at State Street Global Advisors.
Treasury yields rose slightly after Powell said the Fed intends to keep its asset purchases at current levels for now. Some bond market professionals had expected the Fed to increase Treasury purchases, and Powell did not commit to that. The 10-year Treasury yield rose to 0.695%.
“We will continue to monitor developments and are ready to adjust our plans as appropriate,” Powell said.
But it was the Fed’s guidance that the markets found accommodating. In the Fed’s latest projections, core inflation is expected to remain low and not reach the Fed’s 2% target until 2023. At the same time, the labor market is expected to improve to the point where unemployment will be 4% in 2023 , below the long-term rate of 4.1%.
“This is dovish: lower rates for longer and higher stocks, weaker dollar,” said Jon Hill, senior fixed-income strategist at BMO. “The Fed is saying we won’t hike in 2023, maybe 2024 … What they are saying is that these are our goals. We expect to have just met them and even then, they are not raising rates.”
Last month, the Fed announced a change to its policy, in which it will now let inflation exceed its target for some time before raising rates. But in the central trend of the Fed’s forecast, the Fed sees core inflation below 2% through 2022. It expects core PCE inflation from 1.3% to 1.5% this year and from ‘1.6% to 1.8% next year. The pace reaches 1.9% to 2% by 2023.
But AB economist Eric Winograd said Powell may have undermined the accommodating message he was sending.
“He noted that targeting an inflation overrun for ‘some time’, as the statement says, means they are not aiming for a ‘sustained’ overrun. So how long is’ some time ‘if it is not sustained?’ “Winograd said.” That inaccuracy is a problem the commission will have to resolve to reap the full benefits of the picture change. It is no coincidence that the stock market, which had been in positive territory, turned negative after the president’s comments. “
Powell said the Fed expects inflation to improve eventually.
“This is a very strong drive forward and we think it will be a lasting drive that will provide significant support for the economy,” he said.
While some Wall Street strategists and investors believe inflation could become a problem, the Fed said it is more concerned about disinflation.