Entering Wednesday’s Federal Reserve meeting, investors questioned whether a clear view would influence an earlier rise in interest rates. Officials were not pushing: Their forecasts showed that rates would not rise from near zero by 2024, unchanged from December.
Surprisingly, this is surprising. Since December, vaccines have been rolled out faster than expected and Congress has implemented trillions of dollars of new fiscal stimulus. Officials have appropriately improved their forecasts of economic growth, employment and inflation. So why not change the path of the flat rates?
The reason is that these rate projections, which appear as dots on charts of Fed quarterly forecasts, are not just a forecast but an indicator tool. Currently, the Fed is determined not to signal confidence too soon.
The economy stands at an unusual place of inclusion. Based on vaccines, stimulation and pent-up demand, there is every reason to believe that growth this year could be at its best in decades. That is clearly what investors are now accepting, judging by rising stock prices and bond yields.
And yet there is little valuable data available to confirm this: Vaccines have not yet reversed the pandemic, and despite one strong jobs report, employment is still over nine million short of the pre-release stage.
Upside down the Fed is not reviewing its rate forecast now and much down. It could provoke suspicion among bond investors that they do not intend to stick to their plan to keep rates close to zero until inflation is above 2% and full earnings have returned. Such suspicion could push market rates higher and make growth less likely to make the Fed ‘s work more difficult.
Some Fed officials clearly see the case for earlier construction: four out of 18 see rates rise by the end of 2022, and another three by the end of 2023. Asking about that at co- In a press release on Wednesday, Fed Chairman Jerome Powell responded by noting that most officials still do not see a build until 2024 or later: “Part of that is wanting to see data rather than just a preview at this point. ”
The unusually high level of uncertainty is putting pressure on officials, he said: “We have not come out of the pandemic before. We have never received this type of fiscal support before. ”
That suggests that if incoming data over the rest of the year is as high as investors and many economists expect, uncertainty should go back and perhaps officers feel confident enough to review their rate expectations. The dots, Mr Powell explained, show “how we think about the future,” they do not “indicate a time when we might or may not.”
Mr Powell’s situation is very similar to that of the government’s infectious disease expert Anthony Fauci. Both are technocrats rooted in hard data and science who are also aware of how the public reacts to what they say about that data and science. Just as Dr. Fauci is not urging the public to ignore defensive behavior in response to declining Covid-19 issues, Mr. Powell does not want the markets to be overwhelmed by good news about the economy.
“I would like to see us take our eyes off the member before we finish the job,” Mr Powell said on Wednesday. He spoke of the efforts of health officials to eradicate the pandemic, but he could have talked about the Fed’s efforts to revive the economy.
Write to Greg Ip at [email protected]
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