Inflation and employment remain well below the Federal Reserve’s targets, meaning easy monetary policy is likely to stay in place, Governor Jerome Powell said Tuesday.
Despite a sharp rise in bond yields this year, which has been accompanied by heightened concerns about inflation, Powell said price pressures have remained largely silent and the economic outlook remains “very uncertain.”
“The economy is very far from our employment and inflation targets and it will likely take time for further significant progress to be made,” the Fed chief said in prepared notes to the Senate Banking Committee.
He added that the Fed is “committed to using our full range of tools to support the economy and ensure that the recovery from the difficult period is as strong as possible.”
Markets reported losses after the publication of Powell’s comments, although major averages remained negative. Treasury yields rose briefly, then fell, and barely changed at the meeting.
However, the speech did not mention the most pressing concern of the market: the jump in longer-term government bond yields in 2021 to levels not seen since the Covid-19 pandemic. For example, the 30-year bond rose more than half a percentage point, while the benchmark 10-year yield rose 44 basis points.
Powell noted that the epidemic “also left a significant mark on inflation” and does not pose a threat to the economy as a whole.
“Following the sharp decline in the spring, consumer prices have partially recovered from the rest of last year. However, for some of the sectors most affected by the pandemic, prices remain particularly soft,” he said. “Overall, on a 12-month basis, inflation will remain below the 2 percent longer-term target.”
The Fed revised its approach to inflation last year. He had previously imposed a pre-emptive rate hike when unemployment fell when he thought a stronger labor market would raise prices.
It has now adopted an approach that allows inflation to average above 2% for some time before moving to tightening policy.
“This change means we are not tightening monetary policy solely in response to a strong labor market,” Powell said.
“Better prospects” await us
For the rest of his economic assessment, Powell cautioned, saying that while profits were “uneven and far from complete,” the recent decline in coronavirus cases and the continued introduction of vaccines offer hope.
“While we should not underestimate the challenges we are currently facing, developments point to an improvement in the outlook for the year later. In particular, the continued advancement of vaccinations should help return to normal activities,” he said. “In the meantime, we must continue to follow the advice of health experts to monitor social distance measures and wear masks.”
Consumer behavior is also dual, with significant spending on goods, as evidenced by the highly successful retail in January, but spending on services remains weak while many bars, restaurants and hotels across the country operate with limited capacity.
Powell also noted differences in employment growth, saying blacks, Spaniards and other minorities are still struggling, even as the unemployment rate has fallen from a pandemic of 14.8% to the current 6.3%.
He also noted that the housing sector “has more than fully recovered from the downturn, while business investment and manufacturing output have also picked up”. The aggressive policies of the Fed and Congress played a big part in the recovery, Powell added.
Correction: Powell speaks before the Senate Banking Committee. An earlier version misled the committee.