Federal Reserve chair Powell sends out a dovish message for the markets

Jerome H Powell, the chair of the Federal Reserve, said he and his colleagues have a “high standard” for what full employment means, underscoring that the central bank is likely to be patient in removing its support for the economy.

Powell pointed out that the virus has pushed many people out of the job market and said that “4 percent would be a nice unemployment rate to get to, but it will take more than that to get to maximum employment.” It is unlikely the job market will return to full speed this year, he added, speaking in an online question-and-answer session hosted by The Wall Street Journal.

In fact, Powell’s entire message on Thursday centered on how cautious the central bank plans to be in dialling back economic policies — low interest rates and large-scale bond buying — that are meant to help the economy recover from the painful coronavirus shock. In addition to indications of full employment, Powell said, “We’d want to see inflation sustainably above 2 per cent and we’d want to be on track for inflation to run sustainably above 2 per cent.”

But antsy markets appeared unconvinced: Rates jumped and stocks slumped as the Fed chair spoke. The S&P 500 index, which had been up more than half a percent earlier in the day, fell into negative territory — eventually closing with its third consecutive day of decline.

Investors have begun to pencil in faster growth and higher inflation in recent weeks, betting that a cocktail of big government spending, widespread vaccinations and rock-bottom interest rates are setting the stage for rapid growth and faster price gains. Market players have begun to speculate that the Fed might lift interest rates earlier than expected, even as the central bank’s top officials pledge patience.

“The message, which he sent very clearly, was lower for longer,” said Subadra Rajappa, head of rates strategy at Société Générale. “It was the market reaction I was quite surprised by.” Rajappa said investors might have expected Powell to signal that the Fed was prepared to counteract recent market moves — perhaps by shifting toward longer-term bond purchases, among other policy options. He may have disappointed them by declining to tee up such a change. 

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