Why Powell Doesn’t Bother To Lower Bond Yield Now?

Jerome Powell has a goal that is bigger than the bond market’s near-term inflation concern.

In perhaps his most forthright press conference since taking the helm of the central bank three years ago, the Federal Reserve chair laid out some critical messages for investors who have been propelling bond yields higher on the bet inflation would eventually force his

Fed to tighten monetary policy faster than it’s been indicating.

He’s not unduly concerned by rising yields, control of monetary policy communications resides with him and he’s willing to run the economy hot to help it recover from the fallout of COVID-19. Asked directly during his Wednesday press conference if he was concerned about the increase in Treasury yields, Powell said the financial conditions remain “highly accommodative.”

It was a clear signal that he wasn’t going to bother with the emotional swings over-inflation risk that’s obsessing investors. Powell has an explicit strategy to reflate the economy and he doesn’t think this is going to be easy after decades of low inflation. Therefore, he wants to see actual data and he isn’t persuaded that inflation inertia, where today’s price changes look a lot like yesterday’s, is about to change.

“The fundamental change in our framework is that we’re not going to act pre-emptively based on forecasts for the most part and we’re going to wait to see actual data,” Powell said. “I think it will take people time to adjust to that and the new practice, and the only way we can really build the credibility of that is by doing it.”

Powell repeatedly played down the Fed’s quarterly Summary of Economic Projections. “The SEP is not a committee forecast. It’s not something we sit around and debate and discuss and approve,” he said, noting that the dot plot of interest-rate forecasts submitted by each of the Fed’s 18 policymakers was “not meant to actually be a promise or even a prediction of when the committee will act.”

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