Fed Chairman Powell Looks Forward to More Normal Conditions

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Testifying to Congress, Jay Powell, the Federal Reserve Chairman, said there is hope for a return to more normal conditions yet this year. At the same time, Powell signaled the central bank’s intention of maintaining heavy support for the economy.

Powell’s comments signaled no early tightening of the Fed’s monetary policy, despite the rising growth and inflation expectations. His comments were instrumental in helping technology shares rebound after falling in early trading in New York.

Powell presented a more optimistic assessment of the country’s economic conditions since the outbreak of the coronavirus pandemic. However, he did temper his enthusiasm, suggesting there are still downside risks to the recovery, risks that justified the central bank’s stance.

In his opening remarks to the Senate Banking Committee, Chairman Powell referenced the drop in new cases and hospitalizations. He pointed out that the current vaccination program taking place across the country offers hope for a return to more normal conditions towards the end of the year. However, he did note that the current economic recovery is uneven and nowhere near complete, suggesting the path ahead is highly uncertain.

Powell added, “We should not underestimate the challenges we are facing, but developments tend to suggest an improved outlook later in the year.”

Growth Forecasts Upgraded

The large-scale fiscal stimulus backed by both President Biden and congressional Democrats has prompted several economists to upgrade their 2021 forecasts. Some have warned that a rapid rise in economic activity may be a trigger that causes a jump in inflation. If this were to happen, the Fed might be forced to begin tightening monetary policy sooner than expected.

Based on concerns that higher interest rates could threaten the valuations placed on the shares of technology companies, the NASDAQ Composite fell by almost 4 percent on early Tuesday trades.

In addressing these concerns, officials from the Federal Reserve are playing down the threat of a price-jump. During a Q and A session with senators, Chairman Powell said inflation dynamics are not something that changes on a dime.

Powell pointed to the considerable unused capacity in the labor market, noting there are close to 10 million more Americans unemployed when compared to a year ago. Powell noted this is among the most worrying aspects of the economy.

The economy remains a long way from inflation and employment goals, and both are more than likely to take a considerable time for substantial and sustained progress to be achieved.

During his testimony to senators, Powell was pressed time and time again on the merits of President Biden’s $1.9 trillion stimulus plan. Powell declined to state an opinion or take a position. When questioned by Republic Senator John Kennedy from Louisiana if he would be “cool” with the stimulus bill not being passed by Congress, Powell replied that the question asks me to state an opinion, something I won’t do.”

Financial Markets Factoring in a Rosier Outlook

A sell-off of government bonds accelerated considerably late last week, with the 10-year Treasury note going up from 0.91 percent at the close of last year, to 1.35 percent on Tuesday. Volatility continues in the Treasury market, suggesting the potential for larger swings in the not too distant future.

Inflation-adjusted Treasury yields have jumped as well. This has sparked some concern in the investment community that too fast a rise could threaten the record stock market run being witnessed by Wall Street.

According to Anders Persson of fixed asset fund Nuveen, it is not the levels that would be a concern. It is instead the speed of movement. Persson added, “A half to three-quarter percentage point rise in 10-year Treasury yields over a short time span could “spook” investors.

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