Fed stands pat as economy strengthens. America’s central bank met this week, and while acknowledging improved economic performance, it stopped short of indicating that it will begin tapering its asset purchase program, a key factor in keeping short-term rates ultra-low, anytime soon. In the post meeting press conference, Fed Chair Powell said, while the economy has improved since December, it needs to make substantial further progress, which will take more time to achieve; adding that the Fed expects that near-term price pressures (aka inflation), resulting from pandemic-driven bottlenecks, will be temporary.

Our take: We’ve said over and over again in recent months that the Fed’s #1 priority right now is to ensure that economic conditions are ripe for job creation. And here we go again. Remember when, during Janet Yellen’s term as chair of the Fed, markets obsessed for literally years over the “dashboard” of labor market indicators she was watching to determine when the timing was appropriate to pull back the stimulus punchbowl? At the end of the day, Yellen proved smarter than pretty much anyone in her assessment that there was considerably more slack in the jobs market and less inflation pressure in the economy than conventional gauges otherwise suggested. Fed Chair Powell is now in a similar situation and will likely be even bolder than his predecessor in testing the economy’s ability to operate beyond conventional expectations of neutral.

Want to know which way the Fed is leaning regarding rate hikes? Look no further than the jobs deficit relative to pre-pandemic levels. America’s job market is now 8.8 million jobs shy of where it was before than pandemic began in February of last year. Powell has done his best – as recently as last week’s policy meeting – to communicate that he needs to see much more progress on the jobs front before the Fed is willing to contemplate easing off the stimulus throttle, even stating that a few months of 1 million+ in job gains would not be enough to change its current stance. Given that America’s jobs engine created 916K new jobs last month, that means that we’d need to see a few more months of similar job-creation performance before the Fed could be expected to act to slow things down.

As such, we expect that we’ll see similar job gains in the coming months, and that the Fed won’t clarify the timing of its tightening actions until this summer at soonest, eventually “tapering” in late 2021 or early 2022. By the way, the LIBOR forward curve doesn’t agree with us. It’s anticipating an earlier Fed rate liftoff than we expect.  However, beyond 18 months or so, the forward curve is wrong most of the time.

Environment improved for the always-important consumer, but what about inflation? Consumer’s personal incomes and spending spiked in March. For some perspective, the improvement was the most seen ever, specifically since the data began to be tracked in the late 1940s. The improvements have opened the way for even stronger readings on the state of the consumer – which accounts for 75% of America’s economic activity – in the months ahead. The double whammy of stimulus payments and broadening, vaccination-fueled reopening drove the improvement, and, when combined with a boost from accumulated savings, should support even brighter days in the coming months.

What comes with more money to spend and constrained supply chains? Higher prices, aka inflation. While year-over-year core inflation also accelerated sharply in March, the Fed does not care, calling it “transitory.” How so you ask? Well, according to the Fed, current spikes in things like raw materials costs (e.g. lumber) and higher transportation rates (e.g. gasoline) will eventually come down as slack in the labor market fades. The logic being that, as companies are faced with increasing demand, they will (re)hire, increasing the rate at which they can produce, creating a release of sorts in the pressure valve of higher prices. With the true jobless rate around ~8.8% in March after adjusting for the pandemic shock to labor force participation, the Fed can afford to be patient in its judgment to tap the brakes, at least for now.

US growth accelerated in Q1. GDP expanded at a 6.4% annual rate in Q1, building on the 4.3% growth rate recorded in Q4 2020. At the current pace, the economic slack caused by the pandemic will be absorbed by the middle of this year. Spiking consumption by consumers (as mentioned above) drove the gain in growth. Overall, this suggests consumers have plenty of spending power at their disposal as the economy continues to reopen.