SNAP ANALYSIS: Powell press conference sticks to the script; provides no taper signal

Analysis details (20:27)

In his press conference, Powell continued to push the status quo line, stating that the recovery remains incomplete, although it has happened far quicker than expected and labour market conditions continued to improve. He reiterated the transitory nature of inflation, and that it was unlikely that a persistent rise in inflation will be seen while there is still slack in the labour market. Crucially, Powell again said it would take “some time” for “substantial further progress” to be achieved, and it was still not time to talk about tapering asset purchases, which would be telegraphed in advance; he did state that the Fed would not need to get all the way to its goals to initiate a taper – something that analysts have assumed, since it is the rates guidance which requires max employment and average inflation above target, and it is assumed that the normalisation sequencing would involve tapering well before rate hikes. Powell seemed to link what “substantial further progress” is to the path of the virus, stating that it was likely that to achieve this progress, there will have been progress made on the virus. He said the Fed does not see wages moving up, something that would be seen in a tightening labour market; he added that it might take “some months” to get back to an equilibrium between labour supply and demand, though the US was still a long way from full employment. Asked about the risks of runaway inflation, Powell reiterated the Fed’s inflation guidance and new framework, but added that if expectations materially moved above 2%, the Fed would use tools to bring it down. Powell again made the argument that inflation was likely to see a transitory spike due to base effects, supply bottlenecks, pent-up demand, and energy prices (as has been argued previously). The Fed chair argued these base effects would linger for “a few months” but it was hard to predict how long they would linger. Powell also said that the Fed did not have any test for tapering or lifting rates. The Fed Chair also stated that the Fed was concerned about the prospects of long-term scarring on the labour market, though we have not experienced the level of scarring that the Fed had feared a year ago. On the consequences of policy looser for longer, Powell did not see any financial stability concerns, and attributed the buoyant housing market to low inventories and strong demand conditions. For equity markets, however, Powell saw parts that were a “bit frothy,” while there were some funding issues in money markets, but they are not systemic, adding that the financial stability picture is mixed but manageable, and the Fed did not see a need to tweak the IOER, though could do so if deemed necessary. Overall, the message from Powell was dovish, providing no signals that the Fed was on the cusp of scaling back asset purchases, or pointing to any signposts that we are travelling in that direction. The ‘lower-for-longer’ message supported equities and Treasuries.

28 Apr 2021 - 20:27- Fixed IncomeData- Source: Newsquawk