How much longer can the Fed be boring and predictable?

Whoever thinks it is easy to be boring and predictable never walked a mile in US Federal Reserve chief Jerome Powell’s shoes.

As expected, the Fed closed out its latest two-day policy meeting on Wednesday having kept its benchmark interest rate near zero and without making changes to its bond-buying programme designed to keep long-term interest rates low.

In another unsurprising move, policymakers acknowledged – without being too effusive – that the United States economy is on the mend.

“The sectors most adversely affected by the pandemic remain weak but have shown improvement,” the Fed said its post-meeting statement.

The restraint is indicative of the tough balancing act Fed officials have to pull off in the coming months.

The Fed slashed interest rates to near zero and unleashed a host of other extraordinary measures last year to keep credit flowing to businesses and households and help the economy survive and heal from the devastating blow delivered by the coronavirus pandemic.

But cheap money can’t be a feature of the nation’s monetary policy indefinitely. Too much easy money for too long risks stoking inflation, which makes the dollars in consumers’ wallets not stretch as far. And once inflation starts getting out of hand, it is very tough to rein in.

Powell has made clear – super clear again and again – that he is not worried about rising prices. He thinks price spikes will prove largely temporary as the economy gears back up.

Moreover, the Fed is willing to tolerate inflation trending above its 2 percent target level for a period, if that’s what it takes to help the country’s jobs market recover its pre-pandemic mojo.

The labour market is still 8.4 million jobs shy of recuperating all of the 22 million jobs it lost during the first round of pandemic lockdowns last year, and that deficit doesn’t take into account how much the labour force and the economy have grown since then.

But it’s not just monetary policy that plays a role in inflation. Fiscal support – as in Congress stepping up with generous virus relief aid for businesses and households – can also translate into rising prices.

That’s because consumer spending is the engine of the US economy, driving some two-thirds of growth.

The more stimulus money people get from the federal government, the more they are able to unleash pent-up demand for goods and services. As businesses ramp up operations to cater to those reinvigorated consumers, it can cause bottlenecks in supply chains, and temporary shortages of materials and even labour, causing prices to rise.

Progress on coronavirus vaccinations – something the Fed acknowledged in its post-meeting statement – is also playing a role, as business-sapping restrictions are rolled back and more Americans feel comfortable re-engaging in activities they skipped prior to getting their jabs.

A lot of data is indicating that the economy is well on the mend. Booming even, by some measures.

Retails sales rebounded in March, especially when it came to consumer spending in restaurants and bars – one of the sectors hit hardest by the pandemic.

The jobs market recovery is gaining strength, with the economy adding 916,000 jobs in March and the unemployment rate edging down to 6 percent.

Consumer confidence – a key indicator that gauges how people feel about the economy (gloomy consumers tend to sit on their wallets, while confident ones tend to open them) – hit a 14-month high this month.

As for inflation, consumer prices rose 0.6 percent in March – the biggest one-month jump in more than eight years. Nearly half of that increase was down due to a sharp rise in petrol prices, which tend to be volatile.

On Thursday, we’ll get the first read on how the US economy grew in the first three months of this year.

Again, Powell is not worried about inflation right now. During his post-meeting press conference on Wednesday, he said he thought price increases would be largely “transitory” and offered reporters a rather detailed lesson on “base effects”  –  comparing inflation rates this year to last year’s rock-bottom readings when the economy was tanking.

“It’s very fair to say that the increases we see [in inflation readings] and frankly are about to see later this week are largely due to base effects,” he said.

The conundrum facing the Fed is how to dial back all the support it has given the economy without triggering a repeat of the 2013 “taper tantrum”.

Back then, the Fed found itself in the position of wanting to rein in easy money and raise interest rates. But as soon as it signalled it was even thinking about doing that, financial markets freaked out and sent yields on US Treasuries sharply higher. The surge in Treasury yields threatened to derail the US economy’s long, drawn-out recovery from the Great Recession of 2007-2009.

Obviously, the Fed would like to keep the current recovery on track. And the economy is rebounding at a far faster clip now than it did after the Great Recession.

But at some point – many analysts suspect it will be in the middle of this year – Powell and his fellow policymakers will have to start preparing financial markets for the inevitable. Because easy money can’t last forever.