Markets barely batted an eye at the close of the Federal Open Market Committee's latest meeting. After which, Jerome Powell took to the podium and quashed fears that the Fed might change its monetary policies.
"Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened," the committee said in a statement. "The sectors most adversely affected by the pandemic remain week but have shown improvement. Inflation has risen largely due to transitory factors."
In short, the Fed will keep buying $120 billion in assets every month, and interest rates will stay on the floor. Investors weren't surprised by this outcome. Both Powell and the Fed have insisted that the central bank will only change course based on real-world data rather than economic projections.
Thus the Fed wrote off inflation fears and claimed that recent upticks in the prices weren't signals of inflation but indications that prices are returning to their pre-pandemic levels.
The real change was in the Fed's tone about the risk posed by the coronavirus pandemic. In its statement, FOMC referred to generic "risks to economic outlook," unlike previous comments in which the committee said the virus posed a "considerable risk to the economy."
The Fed has good reason to raise its expectations. The U.S. is awash in money. The latest rounds of stimulus checks are in consumer's pockets, and a $2.5 trillion infrastructure package sits before congress. Non-farm payrolls are the highest in seven months, with 916,000 jobs added in March, and consumer confidence is at a 14 month high.
Economists surveyed by Bloomberg expect the U.S. economy to experience its fastest growth in three decades. They also expect the Fed to pull back on asset purchases by the close of the year.
But that isn't what the Fed is signaling. "We're just in the beginning stages of seeing these good data" San Francisco Fed President Mary Daly told reporters on April 16, quoted by The Wall Street Journal. "We're going to need repeated months of this before we can distinguish optimism about the future from the realization of the future."
In short, the Fed wants employment to return to pre-pandemic levels of 3.5%, or for inflation to reach 2% before the central bank even considers changing course. Powell himself has said that he doesn't expect these conditions to materialize this year. In fact, most Fed officials believe rates won't change until 2024, at the earliest.
The last time the fed pared back it's asset purchases in 2013, a so-called taper-tantrum ensued, with investors fearing that the Fed's change in course could derail the post-2008 recovery.
The Fed insists there'll be no taper-tantrums whenever they decide to scale back bond-buying. When that day comes, Powell has assured markets they'll know about it well in advance.