Powell Signals Accommodative Policy, But Questions Remain on Inflation Targets
“Powell Reiterates Commitment to Accommodative Policy As Vaccinations Remain the Key to Recovery”
By Marc Dupont, courtesy of the Mercatus Center
As the virus-stricken U.S. economy transitions into 2021, many are just beginning to see the light approaching at the end of the tunnel. President Joe Biden was sworn into office on January 20, and he has hit the ground running with a recent $1.9 trillion stimulus bill proposal that would include more relief for ailing families, businesses and communities. In addition to these stimulus efforts, Biden announced that his administration will continue to ramp up vaccine rollouts, and the U.S. also purchased more than 100 million additional vaccines to be distributed later this year. Former Federal Reserve chairwoman Janet Yellen was also nominated and confirmed as the first-ever female Treasury Secretary, and she wasted no time in calling for increased COVID-19 relief efforts. With this new administration putting the pressure on congressional leaders to step up fiscal efforts, the spotlight has also trickled over to the Federal Reserve, whose first Federal Open Market Committee meeting of 2021 took place this past Wednesday.
In line with most of their previous meetings during 2020, Jay Powell and the FOMC announced that they will remain committed to using their range of tools to support the Fed’s mandate of maximum employment and price stability. As such, Powell announced in his press conference that the central bank will continue to target inflation at a rate “moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent.” This remains consistent with the FOMC’s newly adopted average inflation target outlined in its Statement on Longer-Run Goals and Monetary Policy Strategy, which was reaffirmed on January 26. While this may appear to be sufficient forward guidance, there is still much uncertainty surrounding the Fed’s inflation timeline and its new regime. The Fed’s own projections of inflation from December demonstrate that it does not expect inflation to top 2% until at least 2023, and recent market forecasts expect inflation to average just over 2% over the next five years. Furthermore, Powell has provided little clarity regarding exactly how long and at what level the Fed would plan to run inflation above target. This uncertainty will continue to cause credibility concerns for the central bank.
During the press conference, Powell also restated the Fed’s commitment to maintain the federal funds rate range of 0% to 0.25% and the interest on excess reserves (IOER) rate of 0.1%, while continuing to increase Treasury and mortgage-backed securities holdings by $80 billion and $40 billion a month, respectively. However, with the recent news regarding GameStop stock and subsequent fears about a potentially large stock market bubble, concerns have begun to arise regarding the Fed’s role in propping up these financial conditions. The possibility of skyrocketing inflation as a result of Fed policy has also become a rising apprehension for some journalists and lawmakers. Chairman Powell made sure to dispel these rumors during his Q&A with reporters, stating that it remains very appropriate for monetary policy to be this accommodative in the face of the economic challenges and hardships that have been posed by COVID-19. Additionally, he addressed inflationary fears by citing the national and global struggle with disinflationary forces that have been present and persistent over the past year, especially as the Fed still struggles to achieve its own 2% inflation target. Ultimately, Powell concluded that policymakers are much more worried about falling short of a full economic recovery than the possibility of inflation, and that the country is still a long way away from such a recovery.
The Fed chief also stated that nothing is more important to the economy than current efforts to ensure everyone is vaccinated across the country. Powell stressed that, coupled with following regular protocols to prevent the spread of the virus, getting the populace to herd immunity through large-scale vaccination is the single greatest economy policy that can be undertaken at this moment. However, with the prospects of additional government stimulus coming within the next few months, Powell also reiterated that fiscal policy has been essential so far to the economic recovery. He went on to highlight that this remains an avenue for Congress and the new presidential administration and not the Fed, and that more such relief must be “strong and sustained” if the recovery is to be successful. Regardless, monetary and fiscal stimulus efforts will only do so much as long as the virus remains a present threat to the country.
As the U.S. economy continues adapting to the economic conditions caused by the global pandemic, it has become increasingly apparent that there is still no immediate end in sight. Despite this fact, there is hope that increased vaccine purchasing and rollouts as well as the introduction of newer vaccines to the market will further improve the recovery process. In the meantime, the focus will shift back to legislative and executive branches, as debates over the contents of the next fiscal package continue to rage on within Congress and the White House.