In one of the tales of ancient Greece, Odysseus tied himself to the mast of his ship and put wax in the ears of his crew so that they would not hear the bad advice from the Sirens that would cause them to fall into the rocks. .
So it may be with the Federal Reserve, which will not listen to concerns about inflation that may have escaped and remain enthusiastic about their easy monetary policy stance, several former Fed economists said in interviews.
The key moment to be seen is Fed Chairman Jerome Powell’s press conference on Wednesday where he is expected to apply patience and leave policy unchanged even as the U.S. economic outlook has evolved. over the last six months.
In September last year, the country was exposed to a pandemic-contracted coronavirus infection and was heading for a controversial presidential election, with a stand in Congress for any other economic relief.
Since then, lawyers have approved $ 2.8 trillion in fiscal support to the economy and more than 2 million Americans receive the vaccine every day. Forecasts of 7% annual growth have replaced concerns about a recession in the economy this year – a growth rate that has not been heard in 40 years.
But the Fed’s forecast in September, reaffirmed in December, did not see policy flat rates to 2024 at the earliest.
The central bank is also buying at least $ 120 billion a month of Treasurys and mortgage-backed debt to help the economy and its latest guidance is that this quantitative easing will continue “for some time. ”
All the good news about the economy has led the bond market to start thinking that the Fed will start withdrawing from its easy policy stance sooner than expected.
And this is where Powell is expected to stress that it will not be reversed after the Fed’s policy meeting on March 17th.
“Powell is good at Gary Cooper’s element – he’s gracious under pressure and gets away with being dirty in a way that other policymakers would be uncomfortable with,” said Vincent Reinhart, a former Fed economist who now chief economist at BNY Mellon Asset Management.
Reinhart said he couldn’t think of another Fed chair saying “I don’t think of thinking about that” as Powell has done.
After some volatile trading sessions in the U.S. Treasury market earlier this month, only Powell said he was “caught his attention,” Reinhart said.
Yields on 10-year Treasurys started their move higher on Friday to the highest levels in about a year.
While Powell said last week that he would be concerned if the financial situation were tightened in a way that was detrimental to his recovery, Reinhart said Fed chairman at his press conference would stop from something any more certain about market trends.
Compared to the European Central Bank, the Fed will not draw any line in the sand that the markets can challenge, Reinhart said.
“The Fed sees an economy that has full mobility… and can be invisible about the reverse in output,” Reinhart said.
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Economists urged investors to understand that the U.S. central bank has a new policy framework that is linked to economic data, not forecasts. So the central bank will want to see where the economy is later this year before it starts “even thinking about‘ policy change ’”.
As he did earlier this month, Powell could reiterate that investors should not be “deceived” by the rapid decline in the official unemployment rate. It will continue to highlight that 9.5 million jobs have been destroyed by the pandemic.
Powell may be saying “there is a lot of opportunity for benefits in employment before we can kind of dust ourselves and say good work,” said William English, who is now a professor at the University. Yale.
“This is going to be terrible,” said Roberto Perli, a former Fed employee and now an analyst at research firm Cornerstone Macro.
The front end of the output curve is more of a concern for the Fed. Financial markets appear to be priced in around three flat rate rounds by the end of 2023.
One potential “hurdle” for the Fed is its updated forecast of the economy and the so-called “dot plot” of the prospect of a future flat rate path, English said.
The dot plot showing the center “dot” in 2023 may indicate one walking distance. In December only four Fed officials expected a rate hike and the economy is better, he noted.
Lewis Alexander, Nomura’s chief U.S. economist, also believes the middle dot will show one rate increase.
Perli agrees, saying Fed officials will keep an eye on predicting higher policy rates in an environment where the market is already expecting more tension than the Fed that year.
The Fed also needs to accept the improved 2021 economic outlook in the updated forecast.
English said it could think of a forecast that marks economic growth this year but then highlight it and leave sustainable employment in 2023.
“In that case, the construction time may not have really changed,” he said.
Powell can say that the economy is doing better but “we think we can do a lot, a lot better,” said English.
“There are still good ways to go before we get there. And so, therefore, we do not think it is appropriate to raise standards for some time. ”