MNI STATE OF PLAY: Fed To Stay Course Even As Jobs Gap Narrows

The Federal Reserve on Wednesday is expected to stay its course on near-zero interest rates and steady QE despite data showing hiring and spending are gathering momentum now that 42% of U.S. adults have received at least one dose of a Covid-19 vaccine.

While Fed Chair Jay Powell will note a more upbeat outlook and encouraging data, he will emphasize the FOMC's resolve to see the recovery through without wavering in its aggressive efforts to encourage growth.

"It's too early for the Fed to back away in any shape or form to their commitment to providing accommodation until the dual objectives have been met," former Fed Board Research Director David Wilcox told MNI.

"My guess is Powell's primary objective is to reinforce the committee's commitment to see the job through to the end. They will damage their credibility if they back away from that commitment."

Powell will likely reiterate it is too early to speak in concrete terms about when the Fed might begin to pull back its asset purchases, which officials say they will do after the economy has made "substantial further progress" toward full employment and price stability.

MORE PROGRESS NEEDED

Despite a surprisingly strong March jobs report and significant declines in initial jobless claims in recent weeks, employment is still down by more than 8 million compared to Feb 2020. "We want to see a string of months like that so we can really begin to show progress toward our goals," Powell said shortly after the March report.

Former Fed officials told MNI the Fed is likely to define "substantial further progress" toward its maximum employment goal as just over halfway between where the labor market stood in December and policymakers' judgement of full employment, opening the door to a QE exit.

The Fed is also worried an eventual move to pare back its hefty bond-buying program could disrupt financial markets, fueling tighter conditions that hamper the recovery, former staffers told MNI.

Meanwhile, inflation has increased on base effects and supply bottlenecks. The Cleveland Fed Inflation Nowcast expects PCE inflation to accelerate to 2.3% in March and 2.9% in April.

Most Fed officials believe a rise in inflation will prove temporary, but some say it will take some time to get clarity. Powell will also be sure to note that inflation expectations remain well anchored. The Fed has been clear it welcomes inflation moving above 2% by a modest amount and for a limited period of time and officials will judge progress after allowing real data to accumulate.

IOER, ON RRP HIKE

Some analysts expect the Fed to hike its administered rates this week, including the interest rate on excess reserves and overnight reverse repo rate, as front-end rates have been under pressure and use of the overnight reverse repo facility has increased.

However, the effective fed funds rate has thus far remained steady at 7 bps. Former New York Fed officials and market sources have indicated to MNI the Fed will be patient on making another technical tweak to these rates after upsizing its ON RRP per counterparty limit in March.