Federal Reserve Chairman Jerome Powell on Wednesday said the central bank hasn’t finished the job of restoring the economy to health, a dovish signal that ultra-easy monetary policy will remain in place for months to come.
Powell spoke to reporters after the Federal Open Market Committee decided to hold monetary policy steady, while noting that the sectors of the economy that have already been damaged by the coronavirus pandemic are experiencing another round of pain.
“We have not won this yet,” Powell said.
“The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic,” the Fed’s interest-rate committee said in a statement.
Powell stressed repeatedly that it is premature for the U.S. central bank to contemplate exiting its accommodative monetary policy stance. He said new strains of COVID-19 add to the economic uncertainty.
In the wake of the pandemic, the Fed has cut its policy interest rate close to zero and is buying $120 billion per month of U.S. Treasurys and mortgage-backed securities to help the economy recover from the pandemic.
Powell said the Fed could do more to help the economy if needed.
The Fed sees “slower growth, but not slow enough to trigger action,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
The central bank is trying to convince the markets that it won’t reverse course until the economy has recovered. First, earlier last year the central bank adopted a policy framework spelling out that it won’t raise interest rates at the first whiff of inflation.
And at its last meeting in December, the Fed said it would maintain the purchases until “substantial further progress” is made on its twin goals of low unemployment and stable 2% inflation. Fed watchers think this means the Fed won’t begin to slow asset purchases until 2022 and raise interest rates until perhaps a year later.
Some regional Fed presidents have suggested a tapering could start this year if the economy improved.
Powell said the Fed would be “patient” with any spike in consumer prices this year that result from the economy returning to stronger health. A pickup in inflation would be welcome.
Powell said he was “much more worried about falling short of a complete recovery, and losing people’s careers” than any outbreak of inflation.
“Low inflation is giving the FOMC plenty of room to stay accommodative,” said Mike Feroli, chief U.S. economist at JP Morgan Chase before the meeting.
Conceivably, the Fed might not face pressure to change policy until September, when investors and the central bank starts to get a clearer sense of the outlook for 2022.
Until then, the action may be on the fiscal front with new U.S. Treasury Secretary Janet Yellen now confirmed by Congress.
Powell said he was “absolutely sure” he would have a good working relationship with Yellen.
The new Treasury secretary will try to shepherd President Joe Biden’s proposed $1.9 billion economic relief package through Congress, although analysts expect it will be smaller before it can pass.
At the moment, economists think the economy will be weak in the near-term but expect a surge in growth as the winter ends and more Americans receive coronavirus vaccinations.
Powell said he also saw signs the outlook would improve later this year.
The burning question of the day from reporters was about the recent volatility in the stock market stemming from chat groups on Reddit and other internet forums. Powell refused to comment directly, saying that broad financial stability risks are moderate.
Fed officials recognize that there are potential financial stability risks in this low-interest-rate environment.
Yields on 10-year Treasury notes
tumbled Wednesday close to 1% as stocks fell sharply. The Dow Jones Industrial Average
ended down 634 points, or 2%, in Wednesday trading.