Jerome Powell, Chairman of the U.S. Federal Reserve Bank, speaks at a news conference in Washington, DC on December 11, 2019.

Eric Baradat | AFP | Getty Images

Inflation and employment remain well below the Federal Reserve’s targets, which means simple monetary policies are likely to persist, central bank chairman Jerome Powell said Tuesday.

Despite a sharp spike in bond yields this year, amid mounting concerns about inflation, Powell said price pressures remain largely subdued and the economic outlook is still “highly uncertain”.

“The economy is far from our employment and inflation targets, and it will likely take some time to make significant further progress,” said the Fed chief in prepared remarks for the Senate Banking Committee.

He added that the Fed “is determined to use all of our tools to support the economy and help make the recovery from this difficult period as robust as possible”.

The speech, however, did not mention the market’s most pressing concern: the jump in longer-term government bond yields in 2021 to levels not seen since the Covid-19 pandemic. For example, the 30-year bond is up more than half a percentage point and the 10-year benchmark yield is up 44 basis points.

Powell noted that the pandemic “has also had a significant impact on inflation” and poses no overall threat to the economy.

“After falling sharply in the spring, consumer prices have partially recovered from the rest of last year. However, prices remain particularly weak for some of the sectors hardest hit by the pandemic,” he said. “Overall, inflation remains below our longer-term target of 2 percent on a 12-month basis.”

The Fed revised its inflation approach last year. In the past, preventive rate hikes were levied when unemployment fell as a stronger labor market would drive prices up.

Now it has taken an approach that allows inflation to exceed 2% for a period of time before tightening policies.

“This change means that we won’t tighten monetary policy just in response to a strong job market,” said Powell.

“Improved Outlook” ahead

Powell was cautious about the rest of his economic assessment, saying the recent decline in coronavirus cases and continued vaccine rollouts give hope, even if gains have remained “uneven and nowhere near complete”.

“While we shouldn’t underestimate the challenges we are currently facing, developments point to an improved outlook later this year. In particular, the continued advances in vaccinations should help accelerate the return to normal activities,” he said. “In the meantime, we should continue to follow the advice of health professionals to observe social distancing measures and wear masks.”

Consumer behavior is also a dichotomy: spending on goods is strong, as evidenced by blockbuster retail sales in January. However, spending on services remains weak, while many bars, restaurants and hotels across the country have limited capacity.

Powell also noted disparities in job gains, saying that blacks, Hispanics and other minority groups still face problems even though the unemployment rate has fallen from a pandemic high of 14.8% to its current 6.3%.

He also noted that the housing sector “has more than fully recovered from the downturn, while corporate investment and manufacturing output have also picked up”. Aggressive policies by both the Fed and Congress are an important factor in the recovery, Powell added.