MNI STATE OF PLAY: Powell Pledges Patience On QE and Inflation

Federal Reserve Chair Jerome Powell on Wednesday said it's premature to discuss pulling back asset purchases and batted away worries about a lasting inflation surge, especially with the economy hurt in the short term by a slow Covid-19 vaccine rollout.

Some of his strongest comments from a press conference countered market perceptions about inflation running away, saying significant forces have restrained global prices for decades and that dynamic isn't likely to change. "Expect us to wait and see and not react if we see small and what we would view as very likely to be transient effects on inflation," Powell said. That includes an expected jump in 12-month inflation as last year's weakness shifts the price index as well as a potential rush to go back to bars, restaurants and hotels, he said.

The U.S. remains at least 9 million jobs short of full employment, and the "real" unemployment rate is around 10%, Powell said. The speed and success of the vaccine rollout present "considerable downside risks to the economy," he said.

"It's very much appropriate that monetary policy be highly accommodative to support maximum employment and inflation averaging two percent over time," Powell told reporters after the meeting. The Fed left its near-zero benchmark rates on hold and kept guidance on purchases of at least USD120 billion a month of debt purchases after a two-day meeting.

NO TROUBLING INFLATION

Asked whether Congress's latest USD900 billion fiscal relief package would be inflationary, he stressed inflation has averaged less than 2% for a quarter of a century due to aging demographics and advancements in technology.

"It's very unlikely anything we see now would result in troubling inflation," he said, adding, "If we did get sustained inflation level that was uncomfortable, we have tools for that."

The Fed would be prepared to see inflation "run moderately above 2% for sometime," but "we have not adopted a formula, and we're not going to adopt a formula," he said.

GRADUAL TAPERING

The Fed will also be careful to communicate its intentions on tapering, which itself will also be "pretty gradual." After noting the Fed has learned from the taper tantrum in 2013 to be slow and transparent, Powell said that any talk of QE exit now is "premature."

"We want to see substantial further progress toward our goals before we modify our asset purchase guidance," Powell said. "It's just too early to be talking about dates. We should be focused on progress that we'll need to see."

Sources told MNI before the decision the Fed needs a major pickup in the economy to even consider a change in QE this year and perhaps even into 2022, even with stronger fiscal relief.