Rates Stay Put as Powell Doesn’t “Blink” As Economic Growth Surges

With stimulus, vaccinations, and reopening’s spurring rapid and robust economic growth, all eyes were on Fed Chair Powell today as he discussed this month’s Fed meeting. The top level announcements were expected: no change in the Fed Funds rate (now at zero since last March) and continued quantitative easing as the Fed is purchasing $120 billion a month of treasuries and MBS. The question was, would the Fed’s resolve to continue the ultra-accommodative policies soften? Would there be a hint at when the Fed would start to ease up on these measures, such as lowering the monthly bond purchases. Powell stood firm especially when discussing potential inflation. Invoking classic Fed-speak, he expects inflationary data that will appear in the next few months as “transitory”. He indicated that “upward pressure on prices” over the next few months will be due to temporary factors. These include supply chain bottlenecks stemming from the sudden reopening and “base effects” as the next few months will be compared to the lows of Spring 2020. He again avoided a “taper tantrum” (Treasury sell off) by insisting he is not announcing any plans to slow down the purchases. The question is, when will he? Some Fed watchers believe he will be forced to at the June meeting as growth and inflation data may start to pile up by then. Or possibly, he may feel the right setting and time is the annual Jackson Hole conference in August. The next CPI, core CPI, PCE and core PCE readings will be watched by markets and could spur volatility in Treasuries. Powell spoke of being affected by the large homeless settlement near the Federal Reserve in Washington, he also said he will be meeting with homeless Americans soon. Perhaps the gauge he is really watching is wage inflation, evidence that the economic recovery is reaching to all levels of the economy. The 10 year Treasury has been sitting in a tight range lately at about 1.60%. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners