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Powell asks Fed to keep buying bonds even as outlook improves

(Bloomberg) – Federal Reserve Chairman Jerome Powell has signaled that the central bank is not close to withdrawing support for the pandemic-damaged US economy, even as he has expressed expectations for a return to more normal and improved activity later this year. The economy is far from our employment and inflation targets, and it will probably take time for further substantial progress to be made, ”he told the Senate Banking Committee on Tuesday. He also downplayed fears of an inflation epidemic from another big fiscal stimulus package or a surge in pent-up demand as growing numbers of Americans are vaccinated against the virus. And he called the recent surge in bond yields that rocked the stock market as a “statement of confidence” in a strong economic outlook. The Fed currently buys $ 120 billion in assets per month – $ 80 billion in treasury securities and $ 40 billion in mortgage-backed debt – and has pledged to maintain that pace “until substantial further progress ”has been made towards its targets for maximum employment and 2% inflation. The president “has given absolutely no indication that the Fed is considering changing its very accommodative policy,” Cornerstone Macro analysts Roberto Perli and Benson Durham wrote in a note to clients. Powell’s testimony came against a backdrop of growing optimism about the economy as coronavirus vaccines spread more widely and expectations of a new fiscal stimulus from President Joe Biden and Congress rise. Bond yields rose on the back of better economic prospects and in anticipation of accelerating inflation. Some traders have also advanced their expectations for the Fed’s first interest rate hike since it effectively cut rates to zero last year. Powell said it was important to find out what was behind the higher bond yields – the expectations of a return to a more normal level. “In a way, this is a statement of confidence on the part of the markets that we will have a robust and ultimately complete recovery,” he said. Market price action has been volatile following the release of the text of Powell’s opening statement, with 10- Annual returns initially rising a few basis points to 1.3875%, before the movement quickly faded and yields fell by roughly the same amount Interest rate swap markets are pricing the first 25 basis points of the Fed’s hikes in mid-2023, compared to the 2024 start period set for early this month.Read more: Traders see earlier Fed hikes, even as Goldman warns PaceTechnology stock has caused U.S. stock prices to fall on T Wednesday on concerns that valuations have spiraled out of control amid rising bond yields and bets on faster inflation. Even with recent weakness, the S&P 500 is still up more than 70% from lows reached in March. Powell said he had no opinion on whether that constituted. a stock market bubble, noting that opinions had been expressed on both sides of this proposal. “No one can really identify” a bubble, he said. Powell admitted that loose monetary policy played a role in driving up asset prices. But he said other forces were also at play, including expectations of faster economic growth. “While we should not underestimate the challenges we currently face, the developments indicate an improving outlook for later this year,” said Powell. “In particular, the progress underway in the field of vaccinations should help speed up the return to normal activities.” In response to a question, the Fed chairman said growth could be 6% this year. The economy contracted 2.5% last year. The economy started 2021 on a strong note, with the acceleration of retail sales and industrial production. In the wake of the firmer data, Bloomberg Economics last week raised its growth forecast for 2021 to 4.6% from 3.5% and said that could increase to 6% -7% if the program d Biden’s $ 1.9 trillion aid was passed. Federal Reserve Chairman Jerome Powell’s prepared remarks to the Senate Banking Committee showed little to no deviation from the tone of recent public statements. But “no news” is news in itself, as it shows that the Fed is steadfast in its policy, despite rising Treasury yields and an improving tone of most economic data .– Carl Riccadonna and Yelena Shulyatyeva , economists Notice, click here The job market has eased, however, as unemployment benefit claims hit a four-week high in the last reporting period. Last month the wage bill barely rose, by 49,000, after falling by 227,000 in December, and while unemployment fell to 6.3%, this partly reflects more people leaving the workforce. “The high level of unemployment has been particularly severe for low-wage workers and African Americans, Hispanics and other minority groups,” Powell said. “The economic dislocation has turned many lives upside down and created great uncertainty about the future.” He reiterated the Fed’s commitment to keep short-term interest rates close to zero until the labor market has reached its employment peak and inflation has accelerated to 2% – and The personal consumption expenditure price index rose 1.3% in December 2020 from the previous year, well below the Fed’s inflation target of 2%. After eliminating volatile food and energy costs, core inflation hit 1.5%. “I really don’t expect us to be in a situation where inflation will reach worrying levels,” said Powell. months to come, as current price levels are compared to depressed values ​​of a year ago, when the economy was virtually closed, but this effect will be temporary. Prices may also be increased later in the month. year by pent-up demand published as increasing numbers of Americans get vaccinated against the virus. But he said the rise in inflation is unlikely to be large or lasting. Some economists, including former Treasury Secretary Lawrence Summers, have warned that Biden’s $ 1.9 trillion stimulus package could cause the economy to overheat and much faster inflation – – a concern administration officials dismissed as exaggerated. Although Powell refrained from commenting on the Biden package, he said there was no had not had a strong link between larger budget deficits and inflation recently (adds Powell bubble in 13th, 14th paragraphs) For more articles like this please visit us at bloomberg.com Subscribe now to stay ahead with the most trusted source of business information. © 2021 Bloomberg LP


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