Treasury yields rise after the Fed’s policy shift but impact is contained for now
(AF) The US Federal Reserve finished its policy meeting on Wednesday June 16 by bringing forward its expectation for interest rate hikes in 2023 and discussing when it might start tapering its massive bond-buying programme. Treasury yields rose, but the benchmark 10-year closed the day at 1.58% in a contained reaction to the news.
The Fed’s latest policy statement also dropped a longstanding reference to the Covid-19 pandemic being a drag on economic growth.
Fed chair Jerome Powell said central bank policy-makers started “talking about talking about” tapering the central bank’s $120 billion in monthly asset purchases, which officials said would continue until “substantial further progress” has been made toward the central bank’s goals of maximum employment and 2% inflation.
“In coming meetings, the committee will continue to assess the economy’s progress toward our goals,” Powell said, referring to the policy-setting Federal Open Market Committee.
He declined to offer guidance on the timing for any future policy shift, emphasizing that more economic progress is needed before the “substantial further progress” standard is met.
Powell also made it clear the central bank would communicate with markets and the public before making a policy shift. “We will provide advance notice before announcing any decision to make changes to our purchases,” he said.
New projections saw a majority of 11 of 18 Fed officials forecast at least two quarter-percentage-point rate increases for 2023, in a shift to the central bank’s “dot plot”, though officials pledged to keep policy supportive for now to encourage an ongoing jobs recovery.
That rate-hike view, coupled with a new forecast for three years of inflation running above the 2% target, suggests concerns about overheating have risen among members of the Fed’s policy-setting committee.
“Progress on vaccinations has reduced the spread of Covid-19 in the United States,” the Fed said, in a change of tone that has stressed battling the pandemic in recent statements.
New language
The new language does not mean a change in policy is imminent. The Fed on Wednesday held its benchmark short-term interest rate near zero and said it will continue to buy $80 billion in Treasuries and $40 billion in mortgage-backed securities each month to fuel the economic recovery.
But new economic and interest rate projections appeared to add some urgency to the Fed’s planning.
The projections showed the outlook for inflation jumping this year, though the price increases were still described as “transitory.” Overall economic growth is expected to hit 7% in 2021.
The projections were indicative of a recovery moving faster than anticipated, and justifying discussions about the next phase of policy for the Fed.
“This change in stance jars a little with the Fed’s recent claims that the recent spike in inflation is temporary,” said James McCann, deputy chief economist at Aberdeen Standard Investments. “The pressure is on to explain the change in stance without setting hares running.”
The US economy remains about 7.5 million jobs below where it stood at the onset of the pandemic in February 2020. Fed officials still describe that level as “far” from their goal of restoring maximum employment.
They have also attributed the employment shortfall more to logistical issues around workers returning to jobs, than the underlying strength of the economy.
The Fed’s slight shift in policy and expectations received a measured reaction from markets. Treasury yields edged up, with the benchmark 10-year closing the day at 1.58% – which is still well below the high seen in recent months of 1.71%. The S&P 500 equity index closed down by 0.5% and the Nasdaq eased 0.25%.
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