(Bloomberg Opinion) -- Federal Reserve Chair Jerome Powell will present the central bank’s semi-annual monetary policy report to Congress this week, and the tone will remain decidedly dour considering the current economic environment. I anticipate he will be asked why the Fed is not pushing policy further in an effort to accelerate the recovery. Powell will surely keep the door wide open for easier policy, but he can do even better. He should argue that the Federal Open Market Committee did, in fact, ease policy last week, but it was so subtle I wonder if Powell even noticed it himself.

As was widely expected, the FOMC held policy steady at last week’s meeting. The accompanying Summary of Economic Projections, however, suggested a disconnect between policy and the economy. According to the median forecast, meeting participants anticipate unemployment will stay above its long-term level and inflation below the Fed’s 2% target through 2022. 

The disconnect seems even greater considering that Powell added the Fed was following a risk management strategy. The most optimistic forecasts among those in the central tendency have the unemployment rate declining to 4.8% at the end of 2022 while inflation accelerates to a 1.8% rate. If that’s the best-case scenario of the core of the FOMC, then the case for additional action now seems pretty clear under a risk management approach.

How aggressively should the central bank set policy? Former Fed economist Joseph Gagnon, currently a researcher at the Peterson Institute for International Economics, argues the Fed should set the policy rate at  minus 0.5% and expand quantitative easing sufficiently to push 10-year U.S. Treasury yields down to minus 0.3%. In other words, gain control of the entire yield curve out to at least the 10-year horizon, not just the shortest maturities. Former Federal Reserve Bank of Minneapolis President and fellow Bloomberg Opinion contributor Narayana Kocherlakota has also pressed policy makers to adopt negative interest rates. 

Despite such endorsements, the Fed clearly sees little wisdom in pursing negative rates. Still, it has additional tools that it chooses not to use. One reason why is that the Fed believes policy is already in a “good place.” The Fed has locked down expectations that rates will be held near zero through 2022, implemented lending programs to maintain the flow of credit to the economy and continue buying government and related bonds at a rapid pace. Rather than doing more now, policy makers may want to see how the economy evolves in coming months.

Given the risk management concerns mentioned above, however, this “wait-and-see” argument is not very compelling. More compelling is that the Fed doesn’t yet know how to implement those tools. Powell explained that the FOMC discussed forward guidance, asset purchases and were briefed on yield-curve control. He added that policy makers were “actively at work” on how best to “deploy those tools.” Basically, the Fed wants to do more, will likely do more, but just doesn’t yet know how to do it.

Still, I believe the Fed did substantially ease policy last week, although in a very subtle manner. We initially saw the Fed’s commitment to the current pace of asset purchases as holding policy steady. In reality, committing to holding the current pace steady “over the coming months” means the Fed set a new floor under policy and effectively eliminated speculation that it would reduce asset purchases anytime soon. That change probably should have received more attention than it did from either commentators or Powell.

Moreover, Powell emphasized – and I am not quite certain how intentional this was – that asset purchases are not simply about maintaining market functioning. The “market functioning” version of asset purchases keeps the focus on interest rates as the policy tool while the purchases only enable that policy to be effectively transmitted to the economy. Under questioning about why such purchases were still necessary given the improvement in market conditions, Powell argued that the Fed wanted to prevent any backsliding.

Importantly, Powell also stressed that that asset purchases are supporting “highly accommodative” financial conditions. This means asset purchases are not just supporting market function but are directly supporting the economy. Even if market functioning were not impacted by winding back asset purchases, doing so would harm the recovery. Consequently, the commitment to hold the pace of asset purchases steady is an important signal guaranteeing the Feds’ resolve.

What I am looking for is how aggressively Congress pushes Powell to do more to stimulate growth and how he responds. Powell’s comments last week suggest his instinct is take further action and I think that will be on full display.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Duy is a professor of practice and senior director of the Oregon Economic Forum at the University of Oregon and the author of Tim Duy's Fed Watch.

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