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Fed officials emphasize policy 'patience' as outlook improves

·3 min read

By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) - U.S. Federal Reserve officials, facing a potential bout of inflation this spring in an economy turbocharged by vaccines and government spending, on Tuesday said they will nevertheless keep their easy money plans in place in hopes of speeding displaced Americans back to work.

A recent rise in U.S. Treasury bond yields seemed to show investors betting the Fed will move sooner than expected to tighten monetary policy as the recovery gains steam and life returns to normal.

But "we are far from reaching our objectives," Fed Governor Lael Brainard said, ticking off the litany of ways, from 10 million missing jobs to the pandemic-related drop in women's labor force participation, in which the U.S. job market is still falling short.

Inflation is also beneath the Fed's 2% target, and under the central bank's new approach policymakers want it on track to actually exceed that level "for some time" before taking any action to restrain it.

"For all of those reasons...we have quite a bit of ground to cover," before raising the target federal funds rate from its current near zero level, Brainard said in comments to the Council on Foreign Relations. “It is appropriate to be patient...Our statement provides very clear guideposts."


At a separate event, San Francisco Fed President Mary Daly struck a similar tone.

"Our most important virtue will be patience," she told the Economic Club of New York. "We will need to continually and patiently reassess what the labor market is capable of and avoid preemptively tightening monetary policy before millions of Americans have an opportunity to benefit."

The word "patience," she told reporters later, is meant to clarify that "we are not going to react at the first hint that inflation might have breached the (Fed's) 2% goal."

The Fed will need a "big dose of patience in the summer," she added, as inflation likely picks up sharply but temporarily.

She attributed the recent bond yield rise to investors betting on a "brighter future," and said she felt satisfied that monetary policy was set appropriately.


Optimism over a sharp drop in COVID-19 infections since January, the U.S. approval of a third vaccine against the scourge, and progress toward passage of a $1.9 trillion pandemic relief package in Congress have led many Wall Street economists to upgrade their economic growth expectations for this year.

That in turn has raised alarm over a possible surge in inflation that would force the Fed to tamp it with rate increases used to curb investment and spending.

But even as the outlook has improved and talk of inflation increased, Fed officials have countered that with a uniform message: the blow to the economy from the pandemic was so deep, and the risks of an incomplete recovery so great, they will keep their policy in rescue mode until substantial further progress has been made.

"Our reaction function has changed," Brainard said, employing a technical phrase referring to the set of economic developments that trigger a central bank response. If in the past worries about inflation might cause the Fed to nip off a recovery, the aim now is the reverse - to allow some inflation risk in hopes of getting more people to work.

"I will be looking for realized progress toward both our employment and inflation goals. I will be looking for indicators that show the progress on employment is broad based," she said. Tightening policy before those job gains are locked in "risks an unwarranted loss of opportunity for many of the most economically vulnerable Americans."

(Reporting by Howard Schneider and Ann Saphir; Editing by Paul Simao and Andrea Ricci)