Fed officials saw inflation risks as ‘broadly balanced’

Federal Reserve officials said the danger of unexpectedly high inflation was roughly equal to that of unexpectedly sluggish inflation, shrugging off fears of a rapidly overheating economy in the wake of President Joe Biden’s $1.9tn fiscal stimulus.

“Most participants noted that they viewed the risks to the outlook for inflation as broadly balanced,” according to minutes of the Federal Open Market Committee’s meeting in March, released on Wednesday.

“Several remarked that supply disruptions and strong demand could push up price inflation more than anticipated. Several participants commented that the factors that had contributed to low inflation during the previous expansion could again exert more downward pressure on inflation than expected,” they added. 

At the March meeting, the Fed revised sharply higher its forecasts for growth and inflation. According to the minutes, however, officials signalled no urgency to begin pulling back their ultra-accommodative monetary support, which includes asset purchases of $120bn per month and a main interest rate close to zero. 

“Participants noted that it would likely be some time until substantial further progress toward the committee’s maximum-employment and price-stability goals would be realised and that, consistent with the committee’s outcome-based guidance, asset purchases would continue at least at the current pace until then,” the minutes said. 

Jim O’Sullivan, chief US macro strategist at TD Securities, said: “The message more broadly is that there is no rush for tapering or tightening.”

Officials also warned of “elevated” uncertainly surrounding the economic outlook.

“The uncertain course of the pandemic, particularly the emergence of more contagious strains of the coronavirus in the United States and elsewhere, was still viewed as tilting the risks to the economic outlook to the downside”, the minutes said.

The March meeting took place against the backdrop of rising US borrowing costs, which have rattled investors and prompted speculation about the Fed’s willingness to intervene either through its messaging or new policy measures to limit the increase.

The benchmark 10-year Treasury note traded as high as 1.78 per cent last month, up from 0.9 per cent at the start of the year. The yield has since fallen back to 1.65 per cent.

With markets increasingly pricing in the prospects that the central bank will be compelled to tighten its ultra-accommodative monetary policy years earlier than previously anticipated, given the expected robust rebound, investors are bracing for the sell-off in US government debt to gather pace. Yields rise as prices fall.

The FOMC meeting included an extensive debate about the causes and effects of the rise in yields, though policymakers continued to judge financial conditions as “highly accommodative”.

“Participants commented on the notable rise in longer-term Treasury yields that occurred over the intermeeting period and generally viewed it as reflecting the improved economic outlook, some firming in inflation expectations, and expectations for increased Treasury debt issuance,” according to the minutes.

But they warned: “Disorderly conditions in Treasury markets or a persistent rise in yields that could jeopardise progress toward the committee’s goals were seen as cause for concern.”

Only a handful of participants said they worried about “excessive risk-taking and the build-up of financial imbalances”.

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