MNI STATE OF PLAY: Powell Plays Down Improved Fed Outlook

Federal Reserve officials see the U.S. economic rebound progressing quicker than they expected but Chair Jay Powell on Wednesday played down any removal of policy support.

Four out of 18 policy makers see the Fed raising interest rates next year, compared to just one in December, and seven officials see above-0.25% rates in 2023 compared to five last quarter, according to fresh projections released at the conclusion of a two-day Fed meeting. The median forecast sees 2021 GDP growth roaring back 6.5% and headline PCE inflation quickening to 2.4% as vaccinations and fiscal aid reach households strained by the Covid-19 pandemic.

"As the outlook improves very significantly since the December meeting, you would expect forecasts to move up," Powell told reporters. "Nonetheless, the bulk of the committee, the largest part by far of the Committee, doesn't show a rate increase" through 2023, he said.

"We set out clear guidance" that rates won't rise until the economy has achieved full employment and inflation has reached 2% and is on track to overshoot the goal, Powell said. "We are committed to robustly implementing that guidance."

His comments pressured Treasury yields and the dollar but sent stocks higher.

TRANSIENT INFLATION PRESSURE

Supply bottlenecks and a quick rebound in consumer spending could boost inflation this year, but the effect is expected to be "transient," Powell said.

"We continue to expect it will be appropriate to maintain the current zero to 0.25% target range for the federal funds rate until labor market conditions have reached levels consistent with the Committee's assessment of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time," Powell said. "A transitory rise in inflation above 2 percent, as seems likely to occur this year, would not meet this standard."

Core PCE inflation is projected to poke above 2% in 2023, ending the year at 2.1%, but Powell dodged a question over whether that would amount to meeting the FOMC's average inflation target.

"What we'd really like to do is to get inflation moderately above 2%. I don't want to be too specific about what that means because I think it's hard to do that, and we haven't done it yet," he said.

NO TAPER YET

The Fed also refrained from changing its asset purchase program to cap a spike in longer-term yields, as some investors had expected, and offered nothing new on the timing for winding down the pace of bond buys.

In determining whether the economy has made "substantial further progress" on employment and inflation, its threshold for starting to taper, the Fed will use "an element of judgement," Powell said.

"When we see actual data coming in that suggests that we are on track to perhaps achieve substantial further progress, then we'll say so. And we'll say so well in advance of any decision to actually taper," he said.

"Our asset purchases in their current form, which is to say across the curve, USD80 billion Treasuries and USD40 billion in mortgage-backed securities a month -- we think that's the right place for our asset purchases. We could change them in a number of different dimensions should we deem it appropriate, but for now we think our policy stance on that is appropriate," Powell said.