Fed's Brainard Says Bond Yield Surge 'Caught My Eye,' Is Upbeat on Outlook -- 2nd Update
March 02 2021 - 5:57PM
Dow Jones News
By Michael S. Derby
Federal Reserve governor Lael Brainard said Tuesday that the
recent tumult in the bond market is on her radar screen, as she
cautioned market participants that the U.S. central bank remains
far from a place where it can start dialing back its support of the
economy.
"I am paying close attention to market developments," Ms.
Brainard said in a video appearance. "Some of those moves last week
and the speed of the moves caught my eye," the official said,
adding, "I would be concerned if I saw disorderly conditions or
persistent tightening and financial conditions that could slow
progress towards our goal."
Ms. Brainard's comment on the state of the bond market came in a
speech where the official said the economy is likely to chart a
strong recovery this year as vaccines potentially bring an end to
the coronavirus pandemic. But even as the economy picks up steam,
Ms. Brainard said it is unlikely the Fed will be backing off its
strong policy support.
"The economy remains far from our goals in terms of both
employment and inflation, and it will take some time to achieve
substantial further progress" in moving those two measures back
toward where Fed officials want them, Ms. Brainard said. "We will
need to be patient to achieve the outcomes set out in our
guidance," she said.
Ms. Brainard also said that even when the day does arrive and
the Fed can raise rates, "changes in the policy rate are likely to
be only gradual." As for Fed bond buying, the purchases "are
expected to continue at least at their current pace until
substantial further progress has been made toward our goals."
Ms. Brainard spoke amid unsettled financial markets. Over recent
days, Treasury bond yields have risen sharply and many market
participants have questioned the outlook for monetary policy and
wondered if rate increases will arrive sooner than expected, in
part to counter higher inflation. When the Fed last offered rate
forecasts in December, it suggested it could be several years
before it boosts short-term rates from their current near zero
levels. The Fed is also buying $120 billion a month in Treasury and
mortgage bonds.
So far, Fed officials have largely shrugged off the rise in
yields and said it shows a market that is pricing for the prospect
of economic recovery and rising inflation. At the same time, Fed
officials haven't said they need to take action to limit the
increase in yields, which in theory could create headwinds for the
recovery.
Ms. Brainard didn't seem alarmed at recent market moves.
"Various measures of financial conditions are broadly accommodative
relative to historical levels and should remain so," she said.
In a separate video appearance on Tuesday, San Francisco Fed
leader Mary Daly, who has a vote on the rate setting Federal Open
Market Committee this year, was similarly unworried by the rise in
yields.
Ms. Daly, echoing other Fed officials, said the rise in yields
is "a sign investors think the future is a little brighter than
they thought" and "in many ways it's a good piece of news." Ms.
Daly said monetary policy is "in a very good space" right now and
she didn't see a need to push back against the bond market,
although she noted the Fed retains the ability to push down
long-term yields if it chooses to do so.
In her comments on the economy, Ms. Brainard said that while a
good recovery path is likely, how well the economy does depends on
the rollout of vaccinations and whether variants in the coronavirus
could alter the path of the recovery in unexpected ways.
Ms. Brainard said it is very likely that as the economy comes
back into action, there will be a short-lived increase in
inflation, but she doesn't expect any long-term surge in price
pressures. She added the Fed has the tools to deal with unwanted
inflation increases, should they arrive.
"A surge in demand and any inflationary bottlenecks would likely
be transitory, as fiscal tailwinds to growth early this year are
likely to transition to headwinds sometime thereafter," Ms.
Brainard said, adding "a burst of transitory inflation seems more
probable than a durable shift above target in the inflation trend
and an unmooring of inflation expectations to the upside."
Ms. Daly offered a similar view and said inflation is likely to
rise over the summer on a temporary basis, and draw no countering
response from the central bank.
Write to Michael S. Derby at michael.derby@wsj.com
(END) Dow Jones Newswires
March 02, 2021 17:42 ET (22:42 GMT)
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