Federal Reserve Chairman Jerome Powell said on Tuesday that rising Treasury yields were a sign of confidence in the economic recovery, downplaying the risks of inflation as the central bank pursues monetary policies meant to foster a faster rebound.
Treasury yields have approached and, in some cases, broken record highs in recent days as investors see evidence of a fast-paced recovery coupled with an incoming $1.9 trillion relief bill, which some have cautioned will generate sharp increases in inflation.
“It’s very important to ask why are rates moving up,” Powell told the Senate Banking Committee. “And so if you look at why rates are moving up, it’s to do with expectations of a return to more normal levels, more mandate-consistent levels, of inflation, higher growth, an opening economy — in a way, it’s a statement of confidence on a part of the markets that we will have a robust and ultimately complete recovery. Those are the reasons that are behind that, I would say.”
TOP REPUBLICAN WARNS FED CHAIRMAN POWELL AGAINST FOCUSING ON CLIMATE CHANGE AND RACE
Annual inflation has for decades remained stubbornly below the Federal Reserve’s 2% target, but economists, notably former Obama adviser Larry Summers, have suggested that an outsize federal cash injection into an economy that is already on the road to returning to pre-pandemic gross domestic product by mid-2021 will lead to inflation above and beyond projected increases.
Powell said that he didn’t see evidence for those concerns and suggested that the recent history of low unemployment, low interest rates, and ballooning federal debt suggested that prevailing notions of inflation dynamics needed to be revised.
“We don’t really see how a burst of fiscal support or spending that doesn’t last for many years would actually change those inflation dynamics,” Powell said. “There perhaps once was a strong connection between budget deficits and inflation. … There really hasn’t been lately.”
Powell also said that the Fed had no plans to tighten economic policy by buying fewer assets or raising interest rates and that any plan to do so would come with sufficient notice.
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“Monetary policy is accommodative, and it needs to continue to be accommodative,” Powell said. “You can expect us to move patiently over time as we see better data coming in. Right now, we’ve had three months of 29,000 jobs a month — it’s not very much progress. We expect that such progress which we had earlier last year, we had very fast progress — we expect that that will return, in coming months. Expect us to move carefully and patiently and with a lot of advance warning.”
