Unfazed by bond market, Fed sets course for sustained, easy policy
A drop in infections, accelerating vaccinations and likely passage of a $1.9 trillion pandemic relief package have driven a surge in bond yields. Some who worry about inflation have speculated the Fed would act to bolster its current bond-buying program to push down long-term borrowing costs.
Fed officials are not biting.
“If we were seeing a real uptick in real yields, that would give me pause, that would give me concern that the amount of accommodation we are providing to the economy is reducing, and that might warrant us considering a policy response,” Minneapolis Federal Reserve Bank President Neel Kashkari said.
“We are not seeing much movement in real yields” he added, but rather an increase in what bond investors are demanding in compensation to reflect rising inflation expectations.
St. Louis Fed President James Bullard agreed the Treasury market moves do not require more Fed easing. “It’s not matching up right now that we need to be more dovish than we already are,” Bullard said in an interview on SiriusXM Radio.
The remarks from the Fed’s arguably most-dovish policymakers were in line with those of Fed Chair Jerome Powell, who on Thursday said the current policy stance was appropriate, and rejected concern that the recent rise in 10-year yields could impede the Fed’s work.
Under a new policy framework adopted last year, the Fed has promised to keep rates at near-zero level until the economy reaches full employment and inflation hits 2% and looks headed above it. It is also buying $120 billion in bonds a month to further pin down borrowing costs.
Bullard dismissed the need for the Fed to adjust those purchases to cap the rise in yields. He said he would watch for disorderly behavior in the Treasury market.
“Something panicky would catch my attention, but we’re not at that point,” he said.
The 10-year US Treasury note
Bullard reiterated his recent forecast for the US jobless rate, now at 6.2%, to end the year at around 4.5%, and that gross domestic product growth could be around 6.5%.
Nonetheless, he said, we “still need a lot of repair” in the labor market.
The Fed’s policy-making panel next meets on March 16-17. Fed rules prohibit policymakers from making public comments starting Saturday in the runup to the meeting as they engage in intense analysis of economic conditions, revise forecasts, and model what they believe is the proper Fed response.
FAR TO GO
A US government report Friday showing bigger-than-expected job gains in February shows the recovery is headed in the right direction, Cleveland Fed President Loretta Mester told CNN International, but “we are still very far from our goals” of full employment and price stability.
“To make sure that the post-vaccination recovery becomes broad-based and sustainable…from my point of view on policy, I think that’s going to take sustained accommodation from the Fed for some time,” she said.
At a virtual event organized by Stanford University, Atlanta Fed President Raphael Bostic made a similar point. “We’re ready and able…to support the recovery as long and as strongly as necessary,” he said. “We need to do all we can to minimize the long term damage from the pandemic crisis and to make sure that the recovery is as broad based and as inclusive as possible.”
Asked if he agrees with his colleagues that there is no need for the Fed to respond now to rising bond yields, Bostic said high inflation is not a concern now but the Fed will keep watching. “Inflation has not been a real stress point in terms of the economic performance for quite a long time,” Bostic said.
