Federal Reserve Chairman Jerome Powell said Thursday that the central bank will be “patient” in keeping interest rates near zero, even if inflationary pressures start to rise.
Powell cautioned that as the COVID-19 vaccine rollout continues, the Fed could see signs of rising prices amid surging consumer spending. But the Fed chairman noted that he does not expect higher inflation to turn into anything resembling the double-digit inflation of the 1970s.
“If we do see what we believe is likely a transitory increase in inflation, where longer term inflation expectations are broadly stable at levels consistent with our framework and goals, I expect that we will be patient,” Powell said at a Wall Street Journal event Thursday.
Powell’s remarks suggest that the Fed is not eager to change its stance on easy money in the near future. After slashing interest rates to a target range of 0 to 0.25% in the depths of the pandemic, the Fed has absorbed trillions of dollars in U.S. Treasuries and agency mortgage-backed securities.
The Fed is currently buying at least $120 billion a month in assets per month as part of the so-called quantitative easing program.
Powell said the central bank is maintaining an aggressive level of accommodation to the economy with the goal of pulling as many workers back into jobs. With the headline unemployment rate at 6.3%, Powell said a decrease to even 4% would not be enough to convince the Fed to pull back its support.
“It will take more than that to get to maximum employment,” Powell said.
How high is too high for bond yields?
Bond yields tilted higher through the Fed chairman’s words, with the U.S. 10-year gaining as much as 6 basis points to 1.54% at the conclusion of Powell’s remarks.
The surge in longer-term bond yields, and thus longer-term interest rates, have been a major focus for investors worried about whether or not unprecedented stimulus from the Biden administration will drive inflation quicker than the Fed expects.
Bond market signals are pricing in the possibility of a rate hike as soon as 2022, despite commentary from the likes of Philadelphia Fed’s Patrick Harker that he does not expect the Fed to do so that early.
“I’m not looking at a hike anytime in 2022. If there is one, it’s towards the later end of it or in 2023,” Harker told Yahoo Finance Wednesday.
Still, Harker said a tool like yield curve control remains on the table as a policy option. Under such a policy, a strategy in which the central bank commits to purchasing U.S. Treasuries of a targeted maturity until their yields fall below stated levels.
Powell said Thursday that the movement in bond markets caught his attention, but said it would take signs of disorderly conditions or a persistent tightening in financial conditions for the Fed to react.
“It’s always the case that if conditions do change materially, the committee is prepared to use the tools that it has to foster achievement of its goals,” Powell said.
Powell’s remarks are likely to be the last before the Fed’s customary “blackout” period in which officials do not make public remarks, which will lead into the central bank’s March 16 and 17 policy-setting meeting.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.