The Federal Reserve Chairman Jerome Powell yesterday painted a gloomy picture on the state of US employment, believing that published unemployment rates have ‘dramatically understated the deterioration in the labour market’. In a speech titled ‘Getting Back to a Strong Labour Market’ Powell appeared unconcerned about any potential upside risk to inflation. In fact, he said he does not expect ‘a large nor sustained’ increase in inflation right now, while also downplaying a potential pickup as any recovery gains traction, largely reiterating his views from his January post-FOMC press conference. He said price gains from the ‘burst of spending’ as the economy reopens are ‘not likely to be sustained’.
Powell highlighted the fact that the Fed must keep supporting the U.S. recovery with low interest rates because officials have learned a stronger job market will bring broad-based benefits without generating undue inflation. ‘We will not tighten monetary policy solely in response to a strong labour market," Powell suggested the economy is still a long way from full employment because a recent drop in the jobless rate to 6.3% in January overstates the level of improvement. ’Published unemployment rates during COVID have dramatically understated the deterioration in the labour market," Powell said citing the biggest 12-month decline in labour force participation since 1948. He went to say, ‘Experience tells us that getting to and staying at full employment will not be easy’. ‘Important is a patiently accommodative monetary policy stance that embraces the lessons of the past’.
We also had the US Treasury auction USD41bn new 10-year notes at 1.155%, which was 0.2bps through where the current 10 year was trading. The last new 10-year auction to stop through was in August 2019. The buy-side allocation was also very good for a new issue at 80%, vs an average of 76% over the last four refunding auctions. Tonight, there will be USD27bn new 30-year bonds auctioned.