BlackRock Investment Institute

Macro insights

Establishing the credibility of the Fed’s new policy framework

The U.S. Federal Reserve has made clear its higher tolerance for inflation overshoots. It has committed to keeping policy rates pinned near zero while also signaling that it was too soon to consider curbing bond purchases. The Fed needed to establish the credibility of its new higher tolerance for inflation while at the same time acknowledging the powerful economic restart that has caught it by surprise. Fed Chair Jerome Powell said the only way for the central bank to build credibility in its new policy framework is “by actually doing it”. We believe the clear reaffirmation of its commitment to be well “behind the curve” and wait to see actual inflation move above target has helped the Fed regain control of the narrative – for now.

All eyes on financial conditions

BlackRock financial conditions indicators, 2012-2021

Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, March 2021. Notes: The chart shows the 6-month change in basis points in our financial conditions indicators (FCI) for the U.S. and euro area. The FCIs give a forward view of where our Growth GPS – or the 12-month forward consensus GDP forecast may stand in three months’ time – may head and are expressed in GDP terms.

The chart shows the Fed’s verbal interventions have typically occurred when the growth drag from tightening financial conditions is about half a percentage point, based on our BlackRock financial conditions indicators. Last week the Fed showed that it is prepared to lean against premature expectations of higher rates sooner – and that it will be slower to lift rates than in the past. The Fed’s latest actions follow the European Central Bank’s pledge to step up the pace of its bond purchases. We believe central banks are showing their readiness to prevent any sharp tightening of financial conditions that could hurt the activity restart.

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