The market continues to hunger for information, any crumb, on when the FOMC will start to pull back from the ultra-accommodative stance. But there were no such clues at the April FOMC, and Chair Powell said in no uncertain terms that “it is not time yet” to start talking about tapering asset purchases or liftoff.
Though there was a slightly more optimistic tone on the economy and labor market, he reiterated that we’re a long way from meeting the “substantial further progress” test. Powell reminded in his opening comments that the recovery remains “uneven and incomplete.” Later on, he indicated that the run-up in prices is “transitory” and does not meet the sustained criteria of 2% average inflation.
To the surprise of no one, the FOMC left its policy stance unchanged. The Fed maintained its funds rate band at 0% to 0.25%, with $120 bln in monthly QE buying. There were some modest edits in the second paragraph of the statement to reflect the realities of improving growth and rising inflation, but nothing surprising or meaningful in terms of an impending policy response.
Indeed, in the press conference, many of the questions were directed toward the timing of a taper, and Powell met all with the same reply — when the “substantial further progress” test articulated in December is met. The economy is still far from passing that test, he repeated, but assured the Fed will communicate “well in advance.” However, one interesting sidebar from Powell was the mention that the degree of scaring in the labor market and on the small business sector might not be as bad as was assumed a year ago.
The inflation reference was a core feature of the press conference. But Powell stuck to the script and indeed, stressed the transitory nature of the pick-up in prices and pushed hard against recent criticism from Larry Summers that the Fed might be letting inflation get out of control. The Chair stressed the importance of anchoring 2% inflation and said the Fed is well aware of the inflation problems of the 1960s and 1970s, but this is a very different situation now.
The reopening of the economy and the surge in demand is likely to be temporary factors boosting prices. Base effects and bottlenecks are also likely to exacerbate pressures. On base effects, they will work themselves out over time as last year’s weaker prices wash out. Meanwhile, some of the bottlenecks will be resolved in the coming quarters, but it may be some time before they are all gone.
In discussing inflation, Powell heartily stressed that “we understand our job and we will do our job.” The Fed was focused on inflation deviating below the target previously but will use its tools to guide prices back down if there is a persistent pop higher in expectations above 2%. He noted that some progress is being made on inflation, that expectations are back up where they were in 2014 and 2018, while breakevens have risen and are close to “mandate consistent.”
There weren’t any real surprises from the ECB at its meeting in April, with the central bank clearly in wait and see mode as it keeps a close eye on virus developments. The central scenario remains for a recovery later in the year, facilitated by an accelerated vaccine program, although Lagarde did raise the issue of mutations.
On the whole, she sounded relatively cautious. The easing bias remained in place, with rates still seen at current or lower levels for the foreseeable future. Asset purchases will continue at the accelerated pace that was decided at the last meeting and any decision on the future of PEPP has been postponed for now, with the focus now firmly on the June meeting.
The ECB held the key refi rate at 0.00% and the deposit rate at -0.50%. The bank repeated that it expects the “key rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below 2%, within its projection horizon and such convergence has been consistently reflected in underlying inflation dynamics.” The PEPP envelope was left unchanged and will remain at EUR 1850 bln until “at least the end of March 2022.”
The accelerated pace of purchases that was decided at the last meeting is expected to remain in place through until June at least. The June meeting will bring updated staff projections. By then, virus and vaccine developments should also give a clearer picture on the outlook.
The BoJ kept policy settings unchanged, as was widely expected. Interest rate settings, as well as asset purchase schedules, were kept steady. The bank is somewhat more optimistic on the overall economic growth outlook, but at the same time cut its price forecast for this year.
The growth forecast for the current fiscal year was lifted to 4.0% from 3.9%, while the BoJ expects now only 0.1% inflation, and forward projections suggest that the 2% inflation goal remains as elusive as ever. After the BoJ tweaked its policy settings at the last meeting to create room to buy fewer assets. It seems it is now settling in for a lengthy period of stable policy as it waits out the pandemic, which in many parts of the country is far from over.
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