Trading on Wall Street opened slightly higher, moving lower, returning higher in anticipation of Fed Chairman Jerome Powell’s speech at the Wall Street Journal conference – and after Powell failed to allay investors’ concerns – stock markets began to fall, led by the Nasdaq down tonight Up 3.3%, while at the same time yields on US government bonds soared by 10 percentage points to 1.547%, for the first time since February last year – the start of falls following the outbreak of the corona virus.
Earlier it was reported that 745,000 Americans had applied for unemployment benefits, compared to an expectation of 750,000 but above 736 the previous week. The number of unemployed in the US dropped to 4.295 million unemployed, compared to about 4.42 million in the previous week, and above expectations of 4.3 million. This indicates a continued US economic recovery.
What did Powell say tonight that stressed Wall Street again?
The Fed chairman said he expects inflationary pressures in the future, but that too will not be enough for him to spur the central bank to raise interest rates. He said: “We expect that as the economy reopens and hopefully recover, we will see inflation increase through basic effects,” Powell said At the conference. “It could create upward pressure on prices.”
Fed sources told CNBC that the central bank is still far from any action and attempt to influence long-term yields, even though there are Wall Street economists and investors expecting it. The US Federal Reserve currently buys about $ 120 billion a month, mostly long-term, and sells short-term bonds.
Powell reiterated his statements in the past tonight when he said he did not expect the rise in inflation to be long-term but stressed that the rise in yields “caught his attention” as well as the improvement in macroeconomic conditions and that he was following developments.
The Fed chairman added that the US economy is unlikely to reach full employment in the coming year, and that it is likely to take time for the economy to recover sufficiently. He said raising interest rates would force the economy to reach full employment but it will probably not happen this year. Before we get to that, “he said, adding that” even if the economy sees transient increases in inflation – I expect us to be patient with it. “On the other hand, he stressed that the central bank will not allow inflation to reach a high level, because of the dangers involved.
He finally said that economic crises should be dealt with quickly and not stopped in the middle of work, but declined to say how long the Fed will continue to inject trillions of dollars into the markets, or what the volume of its purchases will be in the future.
Last year, Powell stated that the Fed was changing its approach to US inflation – so instead of aiming for a 2% inflation target, the bank would aim for “symmetric inflation” which would average around 2%. The market liked this news and responded with increases, Because that means it’s not going to raise interest rates anytime soon (because for most of the last decade the actual inflation rate has been lower), but now it seems that this weapon in the Fed’s arsenal has exhausted itself and the market is waiting for the next bonanza. The latter.
According to Powell, the main theory of the modern economy is dead
Here at BizPortal, Dr. Avichai Snir and Shlomi Mania explained that the decision of the American governor to abandon the inflation target in favor of “average inflation” is an admission of something that was taboo. It has been 12 years since the onset of the subprime crisis that monetary economists have been debating the role of the Phillips curve in the modern economy. Powell’s announcement says the US Federal Reserve is willing to let economists continue to argue as much as they want. For him at least for now, she’s dead.
The Phillips curve describes the inverse relationship between the unemployment rate in the economy and inflation. According to the theory, when there is high unemployment companies in the economy need less ‘effort’ to attract workers and therefore should not raise wages too much, while when unemployment is low (i.e. everyone works) companies have to pay more to recruit good workers, wages go up and with it inflation.
The fact that in the eyes of the Governor of the Bank of America the Phillips curve is irrelevant is important, because for about 60 years, the Phillips curve has been the basis for everything we know about monetary policy. Any model that attempts to explain the role of central banks starts from the assumption that there is an inverse relationship between inflation and unemployment. As unemployment falls, inflation rises, and vice versa.
Powell actually said – friends, leave this theory, it is not relevant at the moment.