Tag: Federal Reserve

Fed maintains monetary stimulus, cites moderating recovery – BNN Bloomberg
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(Bloomberg) — Declaring that the battle against Covid-19 is not over, Federal Reserve Chairman Jerome Powell pledged to keep the monetary spigots wide open to aid the pandemic-hit economy, brushing aside concerns the super-easy stance will spawn a stock market bubble and too-high inflation.“We have not won this yet,” he told a press conference on Wednesday, after the Fed voted to keep short-term interest rates pegged near zero. “We’re a long way from a full recovery.”Again and again, Powell referred to the poor conditions of the labor market even as reporters asked about the meteoric rise of GameStop Corp. shares and frothy stock market prices. He spoke fervently about the plight of those whose lives have been upended by the virus, repeatedly pointing to the 9 million Americans still without jobs as a result of the pandemic.“He’s doubling down on the human angle,” said Priya Misra, global head of rates strategy at TD Securities. “His job isn’t to get the stock market to a certain level, it is to get to full employment. And he doesn’t see a risk of inflation overshoot.”It was a message for some Fed officials who have entertained the notion that the recovery could be stronger than expected, requiring the Fed to start pulling back on asset purchases this year. It was also a signal to the new administration that the Fed shares its goal of getting Americans back to work as quickly as possible and spreading the benefits of a tight labor market to Blacks and others groups frequently left behind.As Powell spoke, stock prices slumped, suffering their biggest losses since October on growing concerns that the rapid rise of equities in recent months had left them overvalued. Speculation of share dumps by hedge funds whipsawed by price swings may have also contributed to the slide.The Fed chairman declined to comment on the price gyrations in GameStop, a video-game retailer that has seen its market value skyrocket as a surge in retail buying has forced hedge funds to cover their short positions in the stock.Democratic Senator and former presidential candidate Elizabeth Warren cited the frenzy around GameStop in pressing the administration of President Joe Biden to crack down on Wall Street.“It’s long past time for the SEC (Securities and Exchange Commission) and other financial regulators to wake up and do their jobs — and with a new administration and Democrats running Congress, I intend to make sure they do,” she said.Financial Vulnerabilities ‘Moderate’While Powell steered clear of commenting on GameStop, he evinced little concern about the broad-based run-up in stock prices, saying the Fed’s focus is on the resilience of the financial system as a whole. “Financial stability vulnerabilities overall are moderate,” he said.Although the Fed theoretically could raise interest rates to try to head off a stock market bubble, that’s not something it has ever done or plans to do, he added.The Fed chairman also played down worries about a spike in inflation as the economy enjoys what could be strong second half growth, with newly-vaccinated Americans returning to restaurants, movie theaters and sporting events. While some increase in inflation is likely, it probably won’t be large or long-lasting, according to Powell.Patient Powell“We’re going to be patient” and not pull back on support for the economy on the first sign of stepped-up price pressures, he said.In that regard, Powell said it was premature to talk about tapering the Fed’s massive purchases of U.S. Treasury and mortgage-backed bonds, saying it would take “some time” to achieve the threshold for reducing them from their current clip of $120 billion per month.That’s good news for the Biden administration, which is pushing for Congressional passage of a $1.9 trillion stimulus package that would greatly increase the supply of U.S. Treasury debt.What Bloomberg Economists Say“Powell considers falling short of a full recovery as a much more significant risk compared to the possibility of higher inflation. This is in-line with his recent public comment that now is not the time to talk about a policy exit. Instead, it confirms our assessment that the central bank stands ready to provide additional support to the economy, primarily through even more aggressive asset purchases.”– Carl Riccadonna, Yelena Shulyatyeva, Andrew Husby and Eliza Winger (Bloomberg economists). For full report, click herePowell, who’s received the first vaccination of two against the virus, said the Fed remained focused on the downside risks to the outlook and the danger that the pandemic will leave lasting scars on the economy.“Even after the economy fully reopens, I think we are still going to need to keep people in mind whose lives have been disrupted because they’ve lost the work that they did,” Powell said. “It would be wise for the longer run productive capacity of the country if we were to look out for those people and help them find their way back into the labor force even if means continuing support for an additional period of time.”For Brett Ryan, senior U.S. economist with Deutsche Bank AG, “The message was simple.”“They are going to keep pedal to the metal,” Ryan said. “They are not going to use monetary policy as a tool to pop bubbles in asset markets.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
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WASHINGTON — Chair Jerome Powell said Wednesday that the Federal Reserve will keep pursuing its low-interest rate policies until an economic recovery is well underway, acknowledging that the economy has faltered in recent months. The Fed said in a statement after its latest policy meeting that hiring and economic growth had slowed, particularly in industries affected by the raging pandemic, notably restaurants, bars, hotels and others involving face-to-face public contact. The officials kept their benchmark short-term rate pegged near zero and said they would keep buying Treasury and mortgage bonds to restrain longer-term borrowing rates and support the economy. Speaking at a news conference, Powell made clear his belief that the economy will struggle in the coming weeks and months, until widespread vaccinations and government rescue aid eventually fuel a sustained rebound. “We’re a long way from full recovery,” he said. “Something like 9 million people remain unemployed as a consequence of the pandemic. That’s as many people as lost their jobs at the peak of the global financial crisis and the Great Recession.” The Fed statement warned that the virus is posing risks to the economy. But the officials removed phrases from their previous statement in December that had said the pandemic was pressuring the economy in the “near term” and posed risks “over the medium term.” Powell said that language was removed because the Fed policymakers see the pandemic increasingly as a short-term risk that will likely fade as vaccines are distributed more widely. But he also cautioned that the threat remains a serious one, particularly because of the potential harm from new strains of the virus. “We have not won this yet,” Powell said. “There’s nothing more important to the economy now than people getting vaccinated.” As Powell spoke, a broad sell-off on Wall Street knocked more than 600 points off the Dow Jones Industrial Average, handing the stock market its worst day in nearly three months. The drop, which followed a recent record-setting run, came as investors focused on the uncertain outlook for the economy and corporate profits amid a still-raging coronavirus pandemic. Traders were also focused on the eye-popping surge in shares of GameStop, a money-losing video game seller that became the focus of a battle between small investors bidding it higher and big hedge funds betting it would fall. For now, the job market is faltering, with 9.8 million jobs still lost to the pandemic, which erupted 10 months ago. Hiring has slowed for six straight months, and employers shed jobs in December for the first time since April. The job market has sputtered as the pandemic and colder weather have discouraged Americans from travelling, shopping, dining out or visiting entertainment venues. Retail sales have declined for three straight months. Yet the Fed still envisions a sharp rebound in the second half of the year as the virus is brought under control by vaccines and government-enacted rescue money spreads through the economy. Americans fortunate enough to have kept their jobs have stockpiled massive savings that suggest pent-up demand that could be unleashed, with a big lift to the economy, once consumers increasingly feel safe about resuming their old spending patterns. Powell was pressed during the news conference on whether the Fed should respond to the recent speculative surge in the prices of some individual stocks, notably shares of GameStop, and whether that buying frenzy suggested a dangerous bubble in overall stock prices. Powell deflected the questions by saying the Fed’s interest rate policies aren’t well-suited to address speculation in the stock market. In addition, he said, “if you look at what’s really been driving asset prices in the last couple of months, it isn’t monetary policy. It’s expectations about vaccines and also fiscal policy. Those are the news items that have been driving asset values in recent months.” Powell also noted that the Fed is keeping rates low and buying bonds to support economic growth. Reversing those policies to offset potential bubbles in the stock market, he said, could harm the economy. “We don’t actually understand the trade-off,” he said. “Will it actually cause more damage, or will it help? I think that’s unresolved.” The Fed has signalled that it expects to keep its key short-term rate at a record low between zero and 0.25% through at least 2023. Earlier this month, Vice Chair Richard Clarida said he expects the Fed’s bond purchases to extend through the end of this year, which would mean continued downward pressure on long-term loan rates. The central bank said it will continue its bond purchases until it makes “substantial further progress” toward its goals of maximum employment and stable 2% inflation. Powell said “it is likely to take some time” for that progress to be achieved. The Fed’s drive to keep long-term rates low have helped hold down mortgage rates and fueled home sales and price increases. Home prices, for example, surged 9% in November compared with a year earlier, its fastest increase in more than six years. The prospect of significant more government rescue aid and ongoing vaccinations has raised some concern that as Americans eventually release pent-up demand for airline tickets, hotel rooms, new clothes and other goods and services, the economy might accelerate and annual inflation could surge above the Fed’s 2% target. If many companies don’t initially have the capacity to meet that demand, prices would pick up. Powell, however, dismissed those concerns, pointing to several long-run factors that have restrained inflation for more than a decade, such as an aging population that tends to spend less and save more, technological developments that improve efficiency, and overseas competition. “Frankly, we welcome somewhat higher inflation,” Powell said. The Fed believes that inflation sustainably at 2% guards against deflation, a drop in prices and wages. And since interest rates include expected levels of inflation, that gives the Fed more room to cut interest rates. “The kind of troubling inflation that people like me grew up with seems far away and unlikely.” The Fed adopted a framework last year that calls for inflation to average 2% over time. Given that inflation has mostly languished below that level since the Fed adopted it as a target in 2012, policymakers would have to let inflation run above 2% for some time to make up for the years of below-target price increases. Christopher Rugaber And Martin Crutsinger, The Associated Press
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