US tech stock futures rise as bond yields cool after Fed comments, while the Turkish lira plunges

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Jerome Powell stressed that the Fed would maintain support for the economy.

A fall in bond yields triggered a rise in US tech stock futures at the expense of the Dow Jones on Monday, with investors buying back into growth companies after the previous week’s volatility.

Meanwhile the Turkish lira tumbled as much as 15% against the dollar after the country’s president sacked a central bank chief for the third time in under two years.

Futures for the tech-heavy Nasdaq 100 index rose 0.69%, with the dip in bond yields making those more expensive sectors of the stock market more attractive.

Dow Jones futures were off by 1.2% as investors eyed a rotation out of cyclical companies, however, while S&P 500 futures were down 0.44%.

The yield on the key 10-year US Treasury note fell 4.8 basis points to 1.684% after hitting a 14-month high above 1.7% last week.

Bond yields have risen sharply in recent weeks as investors demand higher returns in response to rising growth and inflation expectations.

But the increase has made fast-growing and pricey tech stocks look less attractive, leading to a dynamic in which investors sell Nasdaq companies when yields rise and buy them up again when they fall.

Policymakers from the US Federal Reserve soothed the bond market somewhat over the weekend, as some investors worry the central bank could cut back its support sooner than expected.

Chair Jerome Powell wrote in a Wall Street Journal article: “The recovery is far from complete, so at the Fed we will continue to provide the economy with the support that it needs for as long as it takes.”

Richmond Fed President Thomas Barkin told Bloomberg TV there were no signs yet of undesirable inflation.

Asian stocks were mixed overnight, with China’s CSI 300 rising 1%, but Japan’s Nikkei 225 sliding 2.07%.

Hussein Sayed, chief market strategist at FXTM, said the fallout from the Turkish central bank debacle had knocked Japanese stocks.

“While there should not be a strong link between the Turkish lira and Japanese equity markets, it is believed that retail traders in Japan hold significant leveraged long positions in the lira as a carry trade. Hence, they have to cover these positions by selling equities in local markets,” he said.

The Europe-wide Stoxx 600 index slipped 0.09% in early trading while the UK’s FTSE 100 fell 0.32%.

Turkey’s lira tumbled to close to a record low before recovering somewhat after President Recep Tayyip Erdogan sacked central bank governor Naci Agbal. The currency was down 9.3% on Monday to $0.126.

The firing sparked concerns that Turkey could again cut interest rates, spurring more inflationary pressure.

Lee Hardman, currency analyst at MUFG, said: “Market participants are treating it as a Turkey specific problem so far, although there are clear risks that it could begin to weigh more broadly if the situation continues to escalate in the coming weeks and months.”

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The Fed will end a pandemic-era capital break it gave to Wall Street banks

Federal Reserve
  • The Fed will end a pandemic-era rule that eased banks’ capital requirements on March 31.
  • The policy allowed major banks to hold less cash against Treasurys and was meant to spur lending.
  • The announcement fueled a short jump in Treasury yields and dragged bank stocks lower.
  • See more stories on Insider’s business page.

A rule change that eased capital requirements for major banks will expire as planned on March 31, the Federal Reserve said on Friday.

The pandemic-era policy to give banks relief from what is formally called the supplementary leverage ratio allowed Wall Street firms to keep less cash on hand against Treasurys than usual. The rule aimed to free up banks’ abilities to lend during the downturn, as well as cut down on bond-market froth. By no longer counting Treasurys and central bank deposits when calculating the amount of reserves needed, banks would have more cash to lend out to struggling businesses and households.

The SLR relief was slated to expire at the end of the month, yet investors had been looking to the Fed to clarify whether it would extend the rule. While banks’ quarterly reports showed a robust recovery through 2020, some had expected the relief would continue as part of the Fed’s ultra-easy policy stance.

That group’s reaction to the Friday announcement was captured in knee-jerk reactions across markets. The 10-year Treasury yield temporarily shot higher before paring most of the sudden gains. Bank stocks faced more permanent losses, with JPMorgan, Goldman Sachs, and Morgan Stanley all tumbling immediately after the open.

The central bank said it will soon seek public comment on adjustments to the SLR. New dynamics in the bond market and the broad economic recovery could warrant additional rule changes, according to the Fed.

“Because of recent growth in the supply of central bank reserves and the issuance of Treasury securities, the Board may need to address the current design and calibration of the SLR over time to prevent strains from developing that could both constrain economic growth and undermine financial stability,” the Fed added in a statement.

Still, such adjustments won’t erode the strength of banks’ capital requirements, the central bank noted.

The SLR was formed in 2014 out of a broader set of capital requirements put in place after the global financial crisis. The international regulations, known as Basel III, seek to mitigate financial-system risk by mandating that banks maintain certain ratios of cash in accordance with their leverage.

Implementation of the new rules in 2009 gave the Fed a new tool with which to ease monetary conditions during the coronavirus recession.

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Bitcoin rises 5% to $58,000 after Fed keeps policy steady and Morgan Stanley offers crypto funds

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Bitcoin has risen around 1,000% in the last year

  • The bitcoin price rose sharply overnight to close to $60,000 before slipping back to around $58,000.
  • The Fed stressed it would keep monetary policy loose, while stimulus checks are being sent out.
  • Morgan Stanley plans to give its rich clients access to bitcoin as institutional interest grows.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Bitcoin flirted with the $60,000 barrier again on Thursday after a sharp fall from record highs earlier in the week, with stimulus and institutional interest boosting the world’s biggest cryptocurrency.

The bitcoin price (BTC) was up 5.3% to $57,874 at 10.30 a.m. EDT, having earlier topped $59,500.

That was off a high of close to $62,000 touched on Saturday, but well up from a low of below $54,000 hit on Tuesday. Bitcoin has risen around 1,000% in a year.

Ethereum’s cryptocurrency ether (ETH) rose to $1,850 on Thursday before slipping back to around $1,790, up 1% for the day.

Edward Moya, senior market analyst at Oanda, said Wednesday’s Federal Reserve statement had helped the bitcoin price.

The Fed said it planned to keep supporting the economy until employment and inflation picked up and foresaw no interest-rate rises until 2024.

Huge amounts of stimulus have been a key driver of the bitcoin boom, and “an accommodative Fed until the job is done should keep the world’s largest cryptocurrency strongly supported,” Moya said.

Justin d’Anethan, head of exchange sales at Diginex, said stimulus checks being sent out to Americans was another factor.

More interest from big institutions also appeared to lift the coin, with Morgan Stanley planning to offer its rich clients access to bitcoin funds, according to CNBC.

D’Anethan said: “It seems that people are buying globally, nudged by Meitu, a Hong Kong listed company, buying yet another $50 million worth of crypto and, overnight, the news that Morgan Stanley will enable its wealthier clients to access BTC funds.”

Adrian Patten, chair of currency infrastructure-provider Cobalt, said: “With such high prices, both liquidity and volumes are increasing and catching up with the more traditional asset classes.”

Other market participants are more skeptical, however, with Bank of America saying on Wednesday that bitcoin does not provide diversification or inflation protection.

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Bitcoin rises 6% to flirt with $60,000 after Fed keeps policy steady and Morgan Stanley offers crypto funds

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Bitcoin climbed on Thursday morning

  • The bitcoin price rose sharply overnight to close to $60,000 before slipping back to around $58,300.
  • The Fed stressed it would keep monetary policy loose, while stimulus checks are being sent out.
  • Morgan Stanley plans to give its rich clients access to bitcoin as institutional interest grows.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Bitcoin flirted with the $60,000 barrier again on Thursday after a sharp fall from record highs earlier in the week, with stimulus and institutional interest boosting the world’s biggest cryptocurrency.

The bitcoin price (BTC) was up 6.3% to $58,280 at 7.20 a.m. EDT, having earlier topped $59,500.

That was off a high of close to $62,000 touched on Saturday, but well up from a low of below $54,000 hit on Tuesday. Bitcoin has risen more than 1,000% in a year.

Ethereum’s cryptocurrency ether (ETH) rose to $1,850 on Thursday before slipping back to around $1,810.

Edward Moya, senior market analyst at Oanda, said Wednesday’s Federal Reserve statement had helped the cryptocurrency market.

The Fed said it planned to keep supporting the economy until employment and inflation picked up and foresaw no interest-rate rises until 2024.

Huge amounts of stimulus have been a key driver of the bitcoin boom, and “an accommodative Fed until the job is done should keep the world’s largest cryptocurrency strongly supported,” Moya said.

Justin d’Anethan, head of exchange sales at Diginex, said stimulus checks being sent out to Americans was another factor.

More interest from big institutions also appeared to lift the coin, with Morgan Stanley planning to offer its rich clients access to bitcoin funds, according to CNBC.

D’Anethan said: “It seems that people are buying globally, nudged by Meitu, a Hong Kong listed company, buying yet another $50 million worth of crypto and, overnight, the news that Morgan Stanley will enable its wealthier clients to access BTC funds.”

Adrian Patten, chair of currency infrastructure-provider Cobalt, said: “With such high prices, both liquidity and volumes are increasing and catching up with the more traditional asset classes.”

Other market participants are more skeptical, however, with Bank of America saying on Wednesday that bitcoin does not provide diversification or inflation protection.

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Fed’s Powell says it’s not yet time to consider shrinking emergency asset purchases

jerome powell
Federal Reserve Chairman Jerome Powell.

  • It’s “not yet” time for the Fed to even consider pulling back its policy support, Chair Powell said.
  • Fed policymakers ruled to hold interest rates at historic lows and maintain its asset purchases.
  • The recovery is “highly uncertain” and the economy is far from hitting the Fed’s goals, Powell said.
  • See more stories on Insider’s business page.

The Federal Reserve expects a strong economic recovery through 2021, but it still aims to maintain ultra-easy financing conditions well into the future.

Members of the Federal Open Market Committee ruled on Wednesday to hold interest rates at historic lows following the conclusion of its two-day meeting. The central bank will also maintain its pace of purchasing at least $80 billion in Treasurys and $40 billion in mortgage-backed securities each month, according to a press release.

Buying such assets accommodates smooth market functioning and thereby supports “the flow of credit to households and businesses,” the Fed said in a statement.

Yet investors and economists alike have looked to Fed officials in recent weeks for any hints at when the central bank will taper its purchases. An unexpected withdrawal from the Fed could spark a sell-off in Treasurys, rapidly lift yields, and prematurely raise borrowing costs while the economy is still rebounding.

Policymakers’ newly improved projections for growth and employment place new pressure on the central bank to tighten monetary policy. Still, it’s “not yet” time to even consider tapering due to lasting risks to the economic outlook, Powell said during a press conference.

Concerns of a rate hike coming earlier than the Fed’s signaling also overlook the lasting risks to the US recovery, the central bank chief added.

“The state of the economy in two to three years is highly uncertain and I wouldn’t want to focus too much on the timing of potential rate increase that far into the future,” Powell said.

Staying on target for inflation and maximum employment

The statement underpins previous commentary from the Fed emphasizing it will patiently wait to reach its goals of above-2% inflation and maximum employment. Economic reopening and stimulus might drive a sudden rise in inflation, but the increase isn’t likely to be permanent, Powell said.

Inflation would then need to steadily trend above 2% before the Fed fully retracts its policy support, he added.

Reaching maximum employment is set to be a similarly lengthy process. While Fed officials now see the unemployment rate falling to 4.5% in 2021, the central bank is also tracking wage growth and labor force participation to determine the labor market’s health.

“No matter how well the economy performs, unemployment will take quite a time to go down and so will participation,” Powell said. “The faster the better. we’d love to see it come sooner rather than later.”

Maintaining loose monetary policy for such a long period marks a paradigm shift for the central bank. Decades-old tenets of economic theory held that unemployment could only drop so much before lifting inflation.

That dynamic is antiquated, at least according to the Fed chair. The previous expansion showed that, even with unemployment below 4% and inflation trending below 2%, hiring and wage growth could improve in historically underserved communities. Failing to give those groups a shot at a robust recovery would set the country back as it emerges from the pandemic, Powell said.

“There was a time when there was a tight connection between unemployment and inflation. That time is long gone,” he said. “We had low unemployment in 2018 and 2019 and the beginning of ’20 without having troubling inflation at all.”

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The Fed’s inflation expectations are ‘optimistic’ and inflation could hit 2.75% by year-end, former Fed special adviser Andrew Levin says

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Fed chair Jerome Powell.

  • Former Federal Reserve special adviser Andrew Levin says inflation could hit 2.75% by year-end.
  • The Dartmouth Economics Professor added that he believes the Fed’s inflation targets are “optimistic.”
  • Levin called the Fed’s Wednesday remarks “a little stale” and said six month annual core PCE inflation is already above 2%.
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The Federal Reserve’s inflation expectations are “optimistic” as inflation could hit 2.5% or even 2.75% by the end of 2021, according to Andrew Levin, a former Federal Reserve special adviser.

Levin sat down with Yahoo Finance on Wednesday after the Federal Reserve meeting to discuss recent announcements.

The Federal Reserve announced on Wednesday that it will maintain target interest rates at near-zero levels and reiterated its commitment to quantitative easing, as well as aggressive asset purchases.

It also revealed it believes the unemployment rate will fall to 4.5% by the end of this year with inflation reaching 2.2%. Just three months ago the Fed predicted an unemployment rate of 5.0% by the end of 2021 and inflation not touching 2% until 2023.

Former Federal Reserve special adviser and current Dartmouth economics professor Andrew Levin said that chairman Powell and the US central bank may be optimistic when it comes to their expectations for low inflation.

“The statement [the Federal Reserve] issued at two o’clock is a little stale. It says that inflation is still running below 2%. The truth is the six-month annual rate of core PCE inflation is already above 2%. So the 2.2% projection for the year as a whole is somewhat optimistic,” Levin said, referring to personal consumption expenditure, which is the broadest set of inflation data tracked by the Fed.

The former Federal Reserve special adviser added that if inflation continues to pick up steam “we could be looking at 2.5% or even 2.75% core inflation.”

Levin said the Fed needs to be clear in communicating how high inflation should be allowed to go if the economy continues to recover, and they should have “contingency plans” in case of a slow down.

Levin’s comments may cause additional anxiety among hedge fund managers, who now believe inflation is the top “tail risk” facing the stock market, according to a Bank of America fund manager survey.

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Fed lifts estimates for US economic growth and employment as vaccination speeds up

Federal Reserve
  • The Fed boosted its estimates for economic growth in its projections since December.
  • US GDP is forecasted to grow 6.5% this year, up from the prior estimate of 4.2%.
  • The Fed also sees the unemployment rate sinking to 4.5% by the end of 2021.
  • See more stories on Insider’s business page.

Federal Reserve policymakers boosted their projections for the US economic recovery on Wednesday as new stimulus and vaccine rollouts pave the way for a summer reopening.

The Federal Open Market Committee’s median estimate for 2021 gross domestic product growth rose to 6.5% this year, and 3.3% for 2022. That compares to the previous forecasts of 4.2% and 3.2%, respectively. The unemployment rate is now expected to dip to 4.5% this year, an improvement from the prior forecast of 5%.

The FOMC released its quarterly summary of economic projections following the second day of its March meetings. The central bank elected to hold interest rates at historic lows and maintain its pace of asset purchases at $80 billion in Treasurys and $40 billion in mortgage-backed securities per month.

The estimates are the first to be published since December, and therefore are the first to include the impact the $900 billion stimulus package passed late last year, the $1.9 trillion plan signed earlier this month, and the improved pace of vaccination. The developments have all been viewed as major boons to the economic rebound and prompted several economists to lift their own growth forecasts.

The nation’s fight against the coronavirus has also shifted significantly since the December FOMC meeting. Daily case counts surged to a peak above 300,000 in early January but have since tumbled to around 50,000 as distancing measures and vaccination curbs the pandemic’s spread.

New stimulus has been criticized by Republicans for risking runaway inflation through the recovery. Fed officials have countered such concerns in recent weeks. Jerome Powell has repeatedly said that, although reopening and stimulus can produce a quick jump in inflation, the effect will likely be temporary and give way to a similarly sharp decline.

The FOMC’s latest estimates reflect such an outlook. Members see personal consumption expenditures inflation – the Fed’s preferred price-growth gauge – reaching 2.4% in 2021, up from the previous 1.8% estimate. Inflation will then fall to 2% in 2022 and reach 2.1% the following year.

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The 10-year Treasury yield has jumped to its highest in 14 months, cutting further into gains for growth stocks

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Federal Reserve Chairman Jerome Powell.

  • Borrowing costs are rising as implied by the benchmark 10-year Treasury yield, which hit its highest since January 2020.
  • Tech stocks fell as the yield pushed past 1.6%, drawing the Nasdaq Composite down 1% during Wednesday’s trading session.
  • The Fed would likely spring into action if the 10-year yield were to hit 2% by the end of March, says one analyst.
  • See more stories on Insider’s business page.

Borrowing costs as tracked by the 10-year Treasury note yield rose to their highest in 14 months on Wednesday, with investors pricing in expectations of hotter inflation while they cut down high-flying growth stocks.

The yield on the benchmark 10-year Treasury note hit 1.67%, a level not seen since mid-January 2020, before the COVID-19 outbreak was declared a pandemic and before it had accelerated in the US. Yields rise as bond prices drop.

The yield has quickly pushed higher since the start of 2021, from around 0.9%, bolstered by improvement in the world’s largest economy after it and other economies worldwide fell into recession last year.

“What the market is trying to price in is a much more optimistic Fed … that is likely to remain committed to providing more accommodation into this economic recovery,” Ed Moya, senior market analyst at Oanda, told Insider on Wednesday before the release of the Federal Reserve’s economic projections and monetary policy decision at 2 p.m. Eastern.

Along with growth, investors also expect inflation to increase and for the Fed to begin raising interest rates after they slashed them to near zero in March 2020 in response to the health crisis.

The step-up in the 10-year yield, which is tied to a range of lending programs including mortgages, has spurred a pullback in growth stocks, notably large-cap tech stocks, and a rotation into cyclical stocks set to benefit when an economy improves.

Those moves showed up Wednesday with the tech-concentrated Nasdaq Composite falling by 1.1% and the S&P 500‘s information technology sector losing 1.3%. Shares of Apple dropped by 2.2%, Google’s parent company Alphabet declined 1.7% and Microsoft gave up 0.8%.

“You’re probably going to see that the Fed is still going to be stubborn as far as when that first rate hike is going to happen, but the markets are just going to go ahead and price that in a lot sooner,” said Moya.

There are market expectations that the Fed will begin raising its fed funds target rate in 2023 from the current range of zero to 0.25%. Meanwhile, more fund managers now consider higher-than-expected inflation would be the biggest danger to the market, replacing COVID-19 as the main risk, according to a Bank of America survey for March.

The US economy is expected to recover further with the US government circulating COVID-19 vaccines from three companies — Pfizer and its partner BioNTech, Moderna, and Johnson & Johnson — and with about 111 million people already vaccinated.

“Also, it doesn’t hurt when you have almost $2 trillion in [fiscal] stimulus get done since your last policy meeting,” said Moya, adding that “the economy is likely to run hot for a little bit.”

A steady grind higher of the 10-year yield “is completely healthy,” said Moya.

“But if this pace continues [and] by the end of the month we’re above 2%, that is going to be somewhat disruptive to the economic recovery,” which would likely prompt the Fed to take action, he said. The Fed’s tools include buying more Treasury bonds, he added.

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Americans’ inflation expectations hit a 7-year high as the economic recovery picked up, Fed survey finds

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Businesses are likely to lift prices in line with consumers’ anticipations.

  • Americans are bracing for the strongest inflation in a decade, according to a new Fed survey.
  • One-year inflation expectations rose in February to 3.1% from 3%, the highest reading since 2014.
  • Price growth hasn’t trended above the Fed’s 2% target since the late 1990s.
  • Visit the Business section of Insider for more stories.

Americans are bracing for the strongest inflation in a decade as new stimulus promises to accelerate the US economic rebound.

Consumers’ median year-ahead inflation expectations rose to 3.1% in February from 3%, according to the Federal Reserve Bank of New York’s Survey of Consumer Expectations – the highest reading since July 2014. The higher expectations come as COVID-19 case counts dive and business activity sharply improves.

Expectations for inflation three years from now held steady at 3%, according to the Fed.

Each reading would represent the highest inflation since 2011, according to data from the World Bank. Price growth hasn’t steadily trended above the Fed’s 2% target since the early 1990s, and the central bank has been trying to counteract weak inflation for decades.

The Fed now aims to seek inflation of more than 2% for a period of time after the pandemic, and the latest survey of consumers signals consumers are gearing up for such conditions.

Inflation expectations are often used as a preview of how price growth will trend. If consumers expect prices to rise a certain amount over time, businesses are likely to lift prices in kind and workers will seek similar increases in their pay.

To be sure, inflation expectations historically run higher than actual price growth. The University of Michigan’s inflation-expectations gauge, for example, has held above 2% over the past decade despite price growth rarely rising to that level.

The Fed has also indicated that, while inflation expectations may rise to their near-term target, it will wait until true inflation trends higher before it pulls back on ultra-loose monetary conditions. New stimulus and economic reopening are expected to fuel stronger price growth, but the effect will likely be short and temporary, central bank chair Jerome Powell said in February.

Elsewhere in the survey, uncertainty around consumers’ inflation expectations rose slightly for the one-year figure and dipped for the three-year forecast.

Home-price inflation expectations held at 4% last month, the highest level since May 2014. Expectations for the one-year change in gas prices rose to a record 9.6% from 6.2%. Median expectations for rent-cost growth similarly rose to a record 9% from 6.4%.

Household spending growth expectations rose to 4.6% from 4.2%, reaching the highest level since December 2014. Forecasted income growth was unchanged at 2.4%, landing well above the April 2020 low of 1.9% but below assumed inflation.

Americans also grew slightly more confident in making their debt payments and in interest rates rising, the Fed found.

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Don’t be fooled by the jobs report, the Federal Reserve isn’t hiking interest rates any time soon

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Federal Reserve Chair Jerome Powell prepares to speak during a House Financial Services Committee hearing on Oversight of the Treasury Department’s and Federal Reserve’s Pandemic Response in the Rayburn House Office Building on December 2, 2020 in Washington, DC.

  • The jobs report was strong, but the US economy has a long way to go to bounce back from the COVID crisis.
  • This means the Federal Reserve isn’t going to ease up on its crisis measures anytime soon, and it certainly won’t raise interest rates.
  • Just listen to Fed Chairman Jerome Powell, he’s going to let the job market run hot. 
  • George Pearkes is the global macro strategist for Bespoke Investment Group.
  • This is an opinion column. The thoughts expressed are those of the author.
  • Visit the Business section of Insider for more stories.

Today’s jobs report from the Bureau of Labor Statistics was good news for the US economy, with businesses reporting 349,000 jobs added in February. But that good news, while welcome, is unlikely to mean anything for Federal Reserve policymakers, who have bigger plans for the labor market than a few strong jobs report numbers.

In a Q&A with the Wall Street Journal yesterday, Fed Chair Jerome Powell outlined the central bank’s areas of focus for the economy. In keeping with the changes to their long-term goals updated last year, the Fed’s labor market target is now “maximum employment”, which officials admit is “a broad-based and inclusive goal that is not directly measurable.” 

Instead of focusing on a single number like the unemployment rate or attempting to keep employment at a level that doesn’t create a risk of inflation, this approach admits that the relationship between inflation and labor markets has broken down in recent decades. So instead of obsessing over inflation and individual labor market numbers, the Fed now hopes to create conditions where jobs are plentiful for all who want them.

Recent experience suggests this is the correct approach. In the pre-COVID economic peak, 80.5% of Americans in their prime working years (25 to 54) had jobs, the highest since 2001 but well short of the record 81.9% from April of 2000. Despite that very broad labor market success, core inflation only rose 1.6% in 2019, illustrating that running labor markets hot was not causing inflation to soar.

This experience – a strong labor market with little inflation – should influence the Fed’s thinking going forward, especially when it comes to the emergency measures put in place to deal with the COVID crisis.

As the economy continues  to recover from COVID, markets have begun to assume that the Fed is going to start to roll back some of these crisis measures over the next year or so. Some investors and Fed watchers believe quantitative easing (purchases of Treasury debt and mortgage-backed securities guaranteed by the federal government) may be “tapered” this year or early in 2022. Interest rate hikes are also, in the view of these market participants, likely to follow. Markets point to investors assuming rates will not be raised this year but some pricing of potential hikes is creeping into the 2022 calendar year and multiple interest rate hikes are fully priced in 2023.

This speculation – both about QE easing and the potential for rate hikes in the next couple of years – is inconsistent with the guidance the Federal Reserve has offered. 

In yesterday’s Q&A, Powell said it was “highly unlikely” that maximum employment would be achieved this year, even though there is “good reason to expect job creation to pick up.” To illustrate why strong jobs growth doesn’t mean the Fed needs to tighten, the chart below shows the prime-age employment/population ratio. As it stands, in order to achieve the same level of employment as pre-pandemic, prime age workers economy would need another 5.04 million jobs.

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Maximum employment likely means a prime-age employment-population ratio well above the prior cycle highs, so the shortfall is even more than that 5.04 million jobs. For context, the solid February jobs report would need to be repeated every month for 14 months to get this ratio at or above its old peak, assuming every new job went just to this category. At the 154,000 pace of job creation for 25-54 year olds only, maximum employment is 33 months away.

This is just one example of how long the hole US labor markets are in will take to climb out of, but interest rate markets are pricing almost four 25 basis point hikes by the Federal Reserve by the end of 2023…which is 33 months away.

Only one thing can be true: either the interest rate markets are wrong, or the Fed is wrong in its commitment to returning the US to maximum employment. If you take the FOMC at its word, job creation numbers this year are almost irrelevant, even if they follow the solid pace set by February’s numbers. What’s really important is the distance to maximum employment, and that remains huge, leaving interest rate speculators only one out if they’re to be proven correct about the path of Federal Reserve policy.

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