Powell retains his dovish credentials at a difficult time for Fed

Jay Powell faced a difficult moment in handling the cash response to Wednesday ‘s pandemic, after a year of crisis – fighting interventions to counter its economic downturn.

The short-term outlook has waned as a result of a new coronavirus strain, prompting some economists and investors to call for a major new mitigation measure from the U.S. Federal Reserve.

But the picture for later in 2021, with the central bank’s own forecasts, has been improving amid clearer vaccine opportunities, showing that stronger action was not needed.

In a delicate balancing act, Fed chairman maintained a sharp rise in central bank asset purchases, but introduced guidelines that will keep them in place for longer. This retained Mr Powell’s sad testimonies and the feeling that the Fed is fighting in the long run, depressing investors.

“The Fed is a signal that they are committed to recovery and will not stop providing accommodation until they have sufficient evidence that the recovery is complete.” ”Said Michelle Meyer, head of US economics at Bank of America. “It means continuing to buy assets, which is becoming increasingly easier – so I think [Mr Powell] I sent a strong message in that regard. ”

In particular, the Federal Open Market Committee said it would continue to purchase $ 120bn of debt each month in order to make “further substantial progress” towards its goals of price stability and maximum earnings, targets may not materialize in the post-pandemic economy for very long.

The lack of clear dovish guidance about the length of the asset purchase program was offset by an increase in total volume or a shift in the combination of the link towards maturities with an even longer date. on some economists who think Mr Powell should not be slowing punches.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said it was a “missed opportunity” at a time when the recovery is in rapid decline. “In short, this is a small discount,” he said. “We understand that the introduction of the vaccine makes the 2021 vision brighter. . . but in the short term the economy needs all the help it can get. “

Line chart of $ tn showing Fed balance sheet moving near high full-time levels

But investors did not take the FOMC’s cautious approach – and during the press conference, Mr. Powell showed no signs of revealing a premature impact on the economy with a coronavirus battery.

He reiterated the Fed’s willingness to take further action, including purchasing assets, if necessary; they dismissed any suggestion that the U.S. central bank could turn the other way and start cutting down the bonds soon; and said any increase in inflation after coronavirus restriction could be irreversible.

Mr Powell and other Fed officials are still expecting a pullback and sadly, with the central policymaker predicting that rate hikes will not rise until the end of 2023. At least they are a little more bullish about the middle outlook time for the U.S. economy than they have been in the past. They improved their estimates for gross domestic product in 2020 and 2021, and saw a better unemployment rate – of 5 per cent – at the end of next year, than they did in September.

“In the second half of next year. . . the economy should perform strongly, ”Mr Powell said at the news conference. “We should be getting people back to work, businesses should be reopening and that sort of thing. The issue is bigger in the next four or five months, getting through the next four or five or six months, ”he said.

In defense of his decision not to be more aggressive now on asset purchases, Mr Powell acknowledged the limits of the Fed’s ability to influence the near-term economic picture, particularly now that interest rates are already close to zero.

Monetary policy works with delay, he said, and at least the financial situation is already healthy.

“We do not believe that the economy is suffering from a lack of a sound financial position, we believe that it is suffering from the pandemic,” Mr Powell said.

He also suggested that a fiscal policy would be far more appropriate for delivering aid over the coming months. With Congress moving closer to a $ 900bn package that Mr Powell said could be “very good” for the economy, that piece of the puzzle had a better chance of falling instead.

“Until we get a full vaccine, there are limits to the extent to which monetary policy can help people who cannot pay their bills,” said Michael Collins, senior portfolio manager at PGIM Fixed Income. “Fiscal policy can fill that need much more quickly and far more than just monetary policy.”

Mr Collins said the Fed had not seen enough “dislocation” to be stronger on asset purchases. “If financial conditions start to weaken and parts of the economy that are sensitive to interest rates start to weaken, they may be able to step in. ”