Back to the ’70s as Fed fuels boom and hopes for no Burns marks

Back to the ’70s as Fed fuels boom and hopes for no Burns marks

News: Back to the ’70s as Fed fuels boom and hopes for no Burns marks.

WASHINGTON (Reuters) – Fed officials will release new economic forecasts on Wednesday. GDP growth is likely to be a blanking number that forms the basis of a historic experiment by the Fed’s policymakers.

Fed Chairman Jerome Powell and colleagues are betting that the economy can take off from the COVID-19 pandemic without creating excessive inflation, and have vowed to keep interest rates low and a tenon for you extended periods of time to flow if they are leaning into a potential economic boom in a way that has not been seen since the early 1970s.

In each of the quarterly forecasts released since June, the average GDP growth forecast by Fed officials was slightly higher than the average for private forecasters polled by Reuters. If so, it would mean expected growth of more than 6.2% this year – the highest annual rate in 37 years.

CHART: Fed vs. private GDP outlook for 2021 –

However, when they deliver their policy statement at the end of a two-day meeting on Wednesday, Fed officials are expected to repeat what they have been promising for months: keep the central bank interest rate near zero overnight and the flow of money into the economy until Americans go back to work, confident that inflation will remain contained, as it has been for about 30 years.

The economic outlook and policy statement are due to be released at 2:00 p.m. EDT (1800 GMT). Powell will hold a press conference shortly after, an event that could prove difficult for the Fed chief.

Markets predict that the Fed may be forced to act earlier than expected. Some policymakers might even point out when new projections show that more of them expect a rate hike sometime in 2023, rather than a year or later.

If a majority sees an increase in 2023, Powell will “have his job cut out for him” to explain how this ties in with the promise to get the economy back to full employment before reducing crisis support that would be provided if the pandemic broke out Tim Duy, chief US economist for SGH Macro Advisors wrote this week.

Nevertheless, investors are already betting on earlier increases, and some economists are also hoisting a red flag with their forecasts. Morgan Stanley, one of the most optimistic predictions that the economy will be completely out of its pandemic by September, sees a “hotter but shorter” business cycle in the Fed’s approach that is likely to lead them to tighten monetary policy early next year .

The coming cycle would be less like the last three expansions – which ended with the pandemic lasting a decade – than it would be like the period after World War II, when the intervals between recessions were shorter and the growth in between was stronger.

That era ended when then President Richard Nixon advocated a loose monetary policy before his re-election in 1972. Arthur Burns, who was the Fed chief at the time, kept interest rates low as the economy accelerated and is often blamed for the resulting rampant inflation that haunted the country for a decade.

This time around, Fed officials argue. Indeed, Powell’s legacy may depend on whether inflation remains tame as the economy recovers or prices rise, forcing the central bank to withdraw its support – perhaps with millions of Americans still out of work.

Your arguments are well rehearsed. Inflation and unemployment no longer behave as they used to; Lower unemployment can now go hand in hand with lower inflation.

The Fed made significant changes to its policy statement over the past year, including these considerations, and the guidance issued in December is expected to apply for the time being. It pledged to continue its $ 120 billion monthly bond purchases until “significant further progress” is made towards full employment and 2% inflation. It also said interest rates would not go up until those targets were actually met.

Neither of these things has happened so far, a point Powell emphasized recently and which is likely to recur on Wednesday. The economy is around 9 million jobs below its pre-pandemic level. The Fed’s preferred inflation rate of 1.5% is well behind its target. A new index of slow inflation expectations is also below target.

CHART: Any further significant progress for the Fed? Significant further progress for the Fed? – –

“CLEAR-EYED”

Still, it is a pivotal moment as Fed officials release projections that contain a wealth of new information.

More than 100 million COVID-19 vaccines have been administered in the U.S. since their December predictions, and daily deaths from the virus have fallen by two-thirds. Optimism has grown and states have begun lifting restrictions on businesses and reopening schools. Washington has also approved two new aid packages worth approximately $ 2.8 trillion that are now being deposited into household and corporate bank accounts.

Much has changed since the Burns era, when wages and inflation were closely linked, the economy relied more on producing and importing oil, and unforeseen shocks from an oil embargo were imminent. [Related graphic: here]

Furthermore, the Fed’s new approach is not an immediate response to political pressure, but rather a change in policy intended to reflect changes in economic officials who have studied for years.

With a focus on job creation and downplaying inflation, the new framework seemed well suited to the labor market crisis sparked by the pandemic. Now the question is how it interacts with an economy that may be recovering faster than is believed possible.

BlackRock analysts have praised the Fed for keeping “a clear eye” on the economic problems and response to the pandemic.

However, Rick Rieder, BlackRock’s chief investment officer for global fixed income, wrote: “At some point, the risks to financial stability of extremely low policy rates combined with the anticipated real economic boom could actually force the hand of the Fed. ”

Reporting by Howard Schneider; Adaptation by Dan Burns and Paul Simao

Original Source © Reuters

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