Central Bank Watch: Fed Speeches, Interest Rate Expectations

ALL QUIET AT THE ECCLES BUILDING

In this edition of Central Bank Watch, we’ll review the speeches made in March by various Federal Reserve policymakers. The information drip has run dry in recent days, however, as the Fed is now in its pre-meeting communications blackout period. The FOMC next meets on Wednesday, March 17.

FEDERAL RESERVE LOOKS PAST RISING YIELDS, INFLATION EXPECTATIONS

Rising US Treasury yields have dragged higher global bond yields, spooking equity markets at home and abroad. But there has been a consistent theme among Fed speakers: rising yields are a positive sign of improving economic growth prospects. Those suggesting that the Fed is ready to throw in the towel may want to reconsider.

March 1 – Barkin (Richmond Fed president) says that shifts in Treasury yields are not trickling down to the real economy yet, noting that “at these levels of interest rates, when I talk to businesses in my district, I do not hear any sense that people are dialing back their investment.” Brainard (Fed governor) sees “prudence” in keeping restrictions on banks’ capital distributions.

March 2 – Daly (San Francisco Fed president) says that the steepening US yield curve is a “sign” of market optimism regarding the shape of the economy. Brainard (Fed governor) says that bond market moves “caught my eye,” and it will take “some time” for the Fed to achieve the necessary conditions to taper its asset purchases.

March 3 – Fed Beige Book released, showing optimism over the state of the economy thanks to increased vaccination efforts. Harker (Philadelphia Fed president) says that “even with some hopeful signs as virus cases fall and the economy continues to reopen, I’m concerned that, as the broader economy climbs upward, far too many workers are being left behind.”

March 4 – Powell (Fed Chair) confirms that the FOMC still sees no reason to change course, simply because of volatility in US Treasury markets, saying “We monitor a broad range of financial conditions and we think that we are a long way from our goals...I would be concerned by disorderly conditions in markets or persistent tightening in financial conditions that threatens the achievement of our goals.”

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