MNI STATE OF PLAY: Powell: Still 'Some Time' Before Tapering

Federal Reserve Chair Jay Powell on Wednesday said even with signs inflation has started to pick up in the start of a strong economic rebound, he's in no rush to dial back bond purchases or raise interest rates.

While the Covid comeback has progressed faster than expected, the recovery is uneven with 8.5 million more people out of work due to the pandemic, Powell said. Supply bottlenecks driving inflation higher will also resolve themselves eventually, he said.

"It will take some time before we see substantial further progress," he said, referring to the Fed's bar for starting to taper its asset purchases from the current level of USD120 billion a month. "We've said we would let the public know when it is time to have that conversation. We said we would do that well in advance to the decision of tapering."

The FOMC in an earlier unanimous statement said "risks to the economic outlook remain" while dropping the word "considerable" from that assessment. More infectious strains of the coronavirus continue to keep caseloads high and consumers cautious, Powell said at a later press conference.

'TRANSITORY' INFLATION

"It's appropriate and important for financial conditions to remain accommodative to support economic activity," Powell said. Massive fiscal support has spurred demand while progress on vaccinations are allowing a return to more normal economic conditions later this year. The Fed in March had already raised its 2021 growth forecast to 6.5%.

Fed officials noted in Wednesday's policy statement "inflation has risen, largely reflecting transitory factors." Powell added that a transitory rise in prices would not meet the Fed's 2% average inflation goal.

As the economy reopens, inflation will pick up further on base effects and because production is responding in fits and starts that are creating supply bottlenecks, he said. "We think it's a matter of when they will pass through, not whether they will pass through. But we can't be confident about the exact timing of that or the size of them. They don't seem especially large at the moment."

Inflation expectations have moved back up to 2018 levels, but "we need expectations consistent well anchored at 2%. We don't see that yet," Powell said.

The Fed chair also sounded downbeat about the prospects for wage inflation, saying that "maybe pay will go up" as labor participation returns to normal.

MONEY MARKET PRESSURES

The Fed on Wednesday also left its interest rate on excess reserves and offering rate on overnight reverse repo at 0.10% and 0%, respectively, despite key secured financing rates hovering at just 1 bp in recent weeks.

The fed funds rate has been well within the target range and money market conditions are fine, Powell said.

"We do expect further downward pressure on rates through asset purchases and also the runoff in the Treasury General Account. But at this point, we didn't see a need to deploy our tools to support rates."