MNI INTERVIEW: Fed Focused on Jobs Recovery, Not Yield Rise

Bond markets are coming more in line with the Federal Reserve's goals and the central bank needs to keep policy easy to rebuild employment and tackle a longer trend of sluggish price gains, Minneapolis Fed research director Mark Wright told MNI.

"Our job is not done," Wright said. "We're very, very far away from where we want to be, and that just overwhelms everything else."

Bond breakeven rates around 2.5% over five years and slightly lower over ten years signal investors see the Fed reaching its goal of a modest inflation overshoot, Wright said in a phone interview on Friday. Other measures of consumer expectations remain modest and market rates also signal long-term expectations for PCE inflation are about 1.7%, he said.

"If anything, we would like to see longer run inflation expectations just being a touch higher," Wright said.

Treasury yields have surged in recent months on optimism that vaccine breakthroughs and massive policy stimulus will jolt the economy out of its pandemic slump and potentially bring a burst of inflation. Fed Chair Jerome Powell on Wednesday affirmed near-zero interest rates into 2023 and downplayed the idea the central bank is anywhere near pulling back on quantitative easing to prevent a big price overshoot.

Reasons for caution include signs of a new Covid-19 variant and rising caseloads across about two dozen states, Wright said. "The possibility of that getting worse as more and more states opened up is part of those considerable risks. So we aren't going to want to react until some of that risk clears."

REBOUND NEEDS CLEAR PROOF

"It's not enough that we forecast an improvement of the economy, we need to actually see an improvement," he said. "We are actually going to need the data to come in, and to show we are in position."

Inflation will see a temporary acceleration against last year's drop in gasoline prices, but slack in the economy and the potential for supply to ramp up suggest that price gains and expectations will remain manageable, he said.

"The problem has been we can't get inflation up, and so I think that just tells us that we don't want to react too soon or overreact to a temporary increase in prices, as long as we are away from our maximum employment goal," Wright said.

Truly restoring the job market likely means not just making up the deficit of 9.5 million positions from a year ago, but also the labor market growth that would have normally been recorded in the period since the pandemic began, he said.

GETTING BACK TO NORMAL

In that light, much of the fiscal expansion so far has been more in the relief category of sustaining people thrown out of work than stimulus that will heat up the economy, Wright said. Even another infrastructure package this year likely wouldn't get the bulk of the money into approved projects right away and would also tend to boost the economy's output rather than just boosting prices.

"For the most part, these kinds of changes, this kind of spending, should serve to get us back to something approximating a normal labor market, getting back closer to maximum employment, and that's a good thing," he said on fiscal expansion.

There is some hope in the idea that major companies have avoided a wave of bankruptcies while smaller firms hit the hardest have shown in the past they can rebuild fairly quickly, Wright suggested. "Because this recession was short and very sharp and much shorter than a lot of recessions are, that's a sign for optimism, but we won't know until we see it come in."

The pandemic remains an overwhelming consideration, he said. "The job of a central banker is to lie awake at night worrying about all other the things that could go wrong. But until we recover from the current recession, the deepest on record, that will be at the front of our minds."