Federal Reserve Chairman Jerome Powell testifies before the Senate Banking Committee hearing on the Quarterly CARES Act Report to Congress on Capitol Hill, Washington, December 1, 2020.
Susan Walsh | Pool | Reuters
Fed chairman Jerome Powell has some nerves to hold back among market participants and wonders when the central bank will begin to slow down the aid it has provided.
The big buzzword that now surrounds the Fed is getting younger. This is an indication that the monthly bond purchases that helped keep the financial system cashless have been withdrawn and encouraged investors to continue taking risks from the very beginning, despite the highest stock market valuations since at least the dot-com bubble .
Markets believe that it is safe to buy as long as the Fed continues to pump.
Powell and other central bank officials say they are committed to keeping bond purchases going – and anchoring short-term lending rates near zero – until the economy shows it is strong enough to run on its own.
A key element in this is inflation, which the Fed aims to keep steady at a level of 2%, which it has largely missed over the past decade. However, should inflation heat up, it will ultimately force the Fed to tighten its policies.
Part of that tightening would be to slow the pace of asset purchases from more than $ 120 billion – hence the “taper” talk, and especially concerns about a “taper tantrum.” The market saw such a reaction in 2013 when former Fed Chairman Ben Bernanke first put forward the idea for the program that was taking place at the time.
Powell will be examined on Wednesday to reassure us that the central bank is not considering tapering, even if some inflationary pressures build up in the system.
Most Fed watchers expect it to do just that.
“Powell is very good at stressing the negative, that is, ‘We don’t even think about raising rates,'” said Vincent Reinhart, chief economist at Mellon, reiterating Powell’s promise in June.
“He’s probably going to push hard on the idea that they have an idea of rejuvenation in the short term, and that’s going to be the negative,” he said.
However, the market is likely to take a positive view of this.
Investors have been riding a Fed liquidity flow since late March 2020 to boost the stock market, as measured by the S&P 500, by about 72%, despite the death grip of the Covid-19 pandemic and the damage it has done to parts of the economy Has.
One key has been an accommodative Fed, which has now announced that the economy can run hotter than in the past in the interests of “inclusive” economic benefit. Powell is looked at to continue this type of conversation.
“The personal dynamic is what will be interesting, how much he pushes back against tapering,” said Reinhart. “He was there during the tantrum and the message he always gives is that you should listen to the chair. It has to make that pretty clear.”
The rise in fears of inflation
There were a few factors that sparked the rejuvenating question.
One goes back to Reinhart’s statement about hearing the chair.
While Powell was clear that the policy should remain accommodative, some of the regional presidents voiced concerns that inflation may rise earlier than expected and force a change in policy as early as this year.
Others were market indicators themselves.
A popular benchmark, the 5-year breakeven point, predicts inflation to rise to 2.15%, its highest level in nearly eight years. (The breakeven point compares the yield on 5-year government bonds with TIPS of the same term.)
There is also significant price pressure in the economy.
The Case-Shiller House Price Index, released Tuesday, rose 9.5%, one of the largest monthly gains in history. And there is always asset price inflation, which includes the meteoric rise in Bitcoin as well as the stock market. Copper, a traditional economic measure, rose more than 32% last year and almost 3% in January alone.
In addition, there is already more than $ 3 trillion in stimulus flowing through the US economy. President Joe Biden plans to add $ 1.9 trillion soon, and then untold amounts for infrastructure and other expenses.
Still, Powell is likely to shake off these indicators and focus on a more macro-based appearance.
What could change
“While a fiscal boom means the economy should run faster, it still has to travel a long way
In order to make adjustments before adjustments are made, the Fed will maintain an attitude of strategic patience for these improvements – especially inflation expectations – to unfold, “wrote Krishna Guha, head of global policy and central bank strategy at Evercore ISI.
It was also clear to the chairman that he wanted to let the markets know in good time when the rejuvenation would begin. Guha assumes that this will not happen until 2022. Then it will be a year before the Fed stops growing its $ 7.5 trillion balance sheet.
As a result, little is likely to change in the statement after the meeting, while Powell will keep the message simple at his press conference that follows.
“We do not expect any significant changes in the statement after the meeting,” wrote Citigroup economist Andrew Hollenhorst. “Later this year, the statement could be radically revised to reflect an improvement in the public health outlook that would include changing or removing the paragraphs of text regarding the downside risk associated with COVID-19.”
That means more zero interest rates and more bond purchases, despite current indicators for the future.
“The market has been on a treasure hunt to find anything that might suggest the Fed is actually thinking of moving,” said Quincy Krosby, chief market strategist at Prudential Financial. “Why should he deviate from what he said now?”
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