If you’ve ever played a game of chess, you might be able to empathize with where Federal Reserve Chairman Jerome Powell and company find themselves leading up to their April rate-setting meeting: the endgame.
With vaccines in arms and hiring on the upswing, storm clouds from the coronavirus pandemic-induced recession appear to be receding, giving officials on the Federal Open Market Committee (FOMC) reasons to be optimistic about a brightening economic outlook. Experts are forecasting that the economy could grow at its sharpest pace in four decades, consumers now better protected against the virus and with an urge to spend after being largely cooped up in their homes for nearly a year (the more affluent ones, at least).
Yet, even novice players know that cornering your opponent doesn’t guarantee a victory. Calculated and consistent playing wins the game, and the Fed’s strategy moving forward will be staying the course with its most intense economic rescue plan yet. That means keeping interest rates at near-zero and leaving other emergency fire hoses intact Wednesday and beyond, even while the financial system shifts into high gear.
“It’s sort of the visualization of Powell standing aside and saying, ‘Nothing to see here — move along,’” says Greg McBride, CFA, Bankrate chief financial analyst. “The Fed’s not going to change. They’re going to continue to remain accommodative and let the economic recovery run its course, with only assistance rather than resistance from the Fed.”
Here’s three things you need to know ahead of the Fed’s April meeting after it concludes its two-day April 27-28 meeting, when officials are all but certain not to touch the benchmark that determines how much you pay to borrow money and how much you’re paid to save.
1. The U.S. economic recovery is making progress
When the Fed last met in March, Congress had just gone nuclear on another major coronavirus relief bill, after President Joe Biden signed the $1.9 trillion American Rescue Plan into law. This time, officials are meeting as that bill officially takes motion.
Employers in March added 916,000 positions, the fastest pace in half a year that showed broad-based gains across almost every corner of the labor market, including pandemic-ravaged sectors such as retail, restaurants and leisure and hospitality.
The number of Americans applying for unemployment benefits also hit new lows in April for two straight weeks. While still historically elevated, the shifting backdrop suggests that the end of the crisis might be in sight.
Powell said the U.S. economy had “hit an inflection point” and is bound to show stronger hiring and growth ahead in an appearance on CBS’ “60 Minutes” that aired April 11, a notable step into the spotlight.
“The skies are clearing, so they’re looking at putting the umbrella away and pulling out the sunglasses instead,” McBride says. “It’s not that they wouldn’t be prepared to react however conditions warrant; it’s just that the economic outlook is a lot brighter now than it was just a couple months ago.”
2. For Powell, no news is good news: Expect officials to emphasize that the economy still needs work
Officials have also been quick to pair their optimism with a caveat: The U.S. labor market still has a long way to go. Nearly 10 million Americans remain unemployed, some 17.4 million are relying on jobless benefits and another four million have dropped out of the labor force since the outbreak began, according to data from the Department of Labor. Another bogeyman around the corner, COVID-19 variants could also prove to knock the rebound off course.
“The Fed will do everything we can to support the economy for as long as it takes to complete the recovery,” Powell also said in a “60 Minutes” interview. “I would say again though, there really are risks out there. And the principal one just is that we will reopen too quickly, people will too quickly return to their old practices, and we’ll see another spike in cases.”
Fed officials could make some minor changes to their post-meeting statement reflecting that more upbeat outlook, but Powell will likely emphasize at the press conference that large gaps in the labor market persist. The chief central banker is also bound to reiterate that the Fed wants to witness “actual” progress instead of projected improvement before they even begin to talk about removing their extraordinary levels of support.
“The Fed certainly has been quick to acknowledge the gains that we’ve made over the past several months, but Powell’s going to temper that excitement about the improvement with the notion that we still have quite a bit of ways to go before we’re out of the woods,” says Lindsey Piegza, chief economist at Stifel.
Not far enough away to be a memory is also a brief sell off in the Treasury market, which back in February sent yields on the 10-year note soaring to levels not seen since before the coronavirus pandemic. That volatility has since calmed, with the 10-year rate settling in at about 1.57 percent as of trading on Thursday, after climbing to as high as 1.74 percent by mid-March.
Reflecting that volatility were concerns that inflation could pop thanks to almost $3 trillion in fiscal stimulus so far this year and the Fed might not be as patient as it says it would.
It’s no coincidence that the volatility has subsided at a time when Powell has been making more public appearances at his fastest pace of the coronavirus crisis. Eight of Powell’s 31 appearances over the past year have taken place since the Fed’s last meeting, the largest cluster of any time period and just two of them testimonies that Congress requires, according to a Bankrate tally.
“It’s a reflection that maybe the Fed is serious, that they’re going to continue to support the economy full throttle for some time to come, even amid a strong recovery and an expected pick up in inflation,” McBride says.
Experts say the U.S. economy performing better than expected is a much more likely scenario than a backslide in the rebound, echoing findings from Bankrate’s First-Quarter Economic Indicator survey, which found that the majority of economists (62 percent) see medium-term risks to the U.S. economy are tilted toward the upside. Still, that’s not going to mean anything different for the Fed.
“Even if we see an economy running a bit hotter than expected and we do see wage pressures, the Fed’s bias is going to be to stay on hold,” says Dan North, senior economist at Euler Hermes.
3. Officials aren’t ‘thinking about thinking about’ tapering, but the process will prove to be tricky when it does come
The Fed has already provided a three-part test for determining when it’s time to withdraw its monetary battleships from the recessionary warzone. When it comes to lifting interest rates, officials will want to see that:
- Job market has reached levels consistent with estimates of full employment;
- Inflation that’s risen to 2 percent; and
- Inflation that’s on track to moderately exceed 2 percent for some time.
But before the Fed lifts interest rates will likely come an adjustment to its asset purchases — the Treasury bonds and mortgage-backed securities that officials have been buying at a pace of “at least” $120 billion a month to keep the financial system awash with credit and longer-term borrowing costs low (think: why mortgage rates have been at historic lows). If the past is any guide, the Fed will likely first decide to slow those purchases and then hold their total assets and liabilities (reflected on a financial statement known as the Fed’s balance sheet). The process is more formally known as “tapering.”
“That would, in all likelihood, be before, well before, the time we consider raising interest rates,” Powell said of tapering in an April 14 question and answer session with the Economic Club of Washington, D.C.
North doesn’t see the Fed lifting interest rates until at least 2023, which would be slightly sooner than Fed officials are projecting themselves, according to their latest Summary of Economic Projections. But his current baseline forecast suggests that tapering could start as soon as sometime next year, though Powell is bound to dodge any questions about the Fed’s timeline.
The biggest challenge will be preparing markets for the eventual taper while avoiding a negative reaction that could threaten business solvency and consumers’ portfolios, from their retirement accounts to their individual investments. Officials might have post-traumatic stress from a similar experience back in June 2013, known today as the “taper tantrum,” when Fed Chairman Ben Bernanke suggested the economy would soon be strong enough for the Fed to start slowing down its monthly asset purchases.
“They’ll tiptoe into this,” McBride says. “This is not a bombshell they’re going to drop on short notice.”
All of that means consumers and investors might want to stay sharp about the months ahead, even as the Fed is in the middle of a holding pattern.
“It is the biggest problem they’re going to face: how they are going to go about backing out when the time comes,” North says. “There’s no big reason to move any time soon, but the important part is being consistent with the messaging. The big challenge out on the horizon is how to get that messaging out, so we don’t have that taper tantrum.”
What this means for you
U.S. central bankers don’t see anything other than low rates and accommodative support on the horizon, and an obvious side effect of that easy-money policy is higher inflation. Price pressures were already expected to pop up in 2021, largely thanks to base effects and simple math.
Most investors say a balanced portfolio is your best bet to protect your wallet against inflation, and the threat of higher prices shouldn’t change your strategy all that much. To safeguard your portfolio, consider padding up your assets with historically inflation-safe investments. Consumers worried about their eroding purchasing power should still keep enough cash on hand to cover emergencies, but don’t keep too much on the sidelines.
“You’re going to have to look beyond cash and fixed income to get your income,” McBride says. “It’s going to mean getting income from across your portfolio, including dividend-paying stocks, preferred stocks and real estate investment trusts.”
Mortgage rates are still at historic lows, meaning homeowners and would-be homebuyers who procrastinated refinancing or buying still have time. Mortgage rates climbed on Treasury market volatility earlier in the year but have since dropped across the board for a third straight week, with the average cost of a 30-year fixed-rate mortgage dropping to 3.21 percent, according to a national Bankrate survey of lenders.
Consumers with high-cost debt might also want to consider whether a balance-transfer card is right for them. Calculate the fees you’d have to pay by refinancing and then compare that with savings in interest payments.
The best might be yet to come on the coronavirus recovery, but economists do expect growth to balance out after a blockbuster rebound in 2021. All of that underscores the importance of keeping your post-pandemic spending in check and continuing to save for emergencies. From the Fed’s perspective, that’s all the more incentive for them to correctly engineer the economy’s landing.
“It’s a sugar high right now that could be sustained if we’re able to somehow get the fundamentals of the economy spinning again in the private market,” Piegza says. “The Fed is going to be very careful not to pull the rug out from underneath this recovery too soon or too fast before we start to see organic trends resurface.”