Powell Weighs in on Stimulus; Risks of Overdoing it are Smaller

I guess the market no longer hangs on every word of Fed Chair Jerome Powell. On Tuesday he re-re-iterated the importance of additional fiscal stimulus and noted that he thinks the “risk of overdoing it” are smaller than underdoing it. And on Wednesday, President Trump effectively killed the fiscal stimulus bill. Well, put it into a short-lived coma may be the more appropriate way to put it. I encourage you to see what my colleague Tom Block has to say on this. See page 9.

This week the Fed released the minutes from its September 15-16 meeting. And for diehard Fed watchers, as always, there were a couple of sound bites worth noting. Most FOMC forecasters were assuming that an additional pandemic-related fiscal package would be approved this year. And noted that without a package, growth could decelerate at a faster-than-expected pace in the fourth quarter.

Relating to its new average-inflation-targeting regime the minutes actually refer to the program as flexible, which I would say is an understatement. Without defining what letting inflation run moderately above 2% means, the FOMC has left it up to us to interpret what the new policy will entail. And this week, Chicago Fed President Charles Evans gave us some insight mentioning that he would be “pleased if we could get inflation up to 2.5% for some time”. Maybe 2.5% is what moderately above 2% means?

Yesterday, the Department of Labor announced that jobless claims came in around a seasonally adjusted 840,000 this week - another sign of what appears to be a slowing pace of economic recovery in the fall. Nevertheless, the ultimate shape of the economic recovery (“V”, “U’, “K”, “square root” etc…) remains unknown.

This week, economist Tim Duy highlighted that The Bureau of labor statistics released its JOLTS report. Interestingly, layoffs and discharges appear to have reverted to their pre-crisis levels while initial jobless claims remain about 4 times higher than their pre-pandemic levels. Yet another set of data pointing towards a convoluted recovery.

The Fed’s Main Street Lending Program continues to be off to a slow start. Almost four months after its launch, only $2.5 billion of the program’s total $600 billion has been extended as of this week, the prospects for a pick-up are dwindling as the design of the program continues to restrict extension of loans.

The Fed’s asset purchases remain in cruise control at $120 billion worth of Treasury and mortgage backed securities per month. And while the Fed has yet to issue any forward guidance on purchases, they show no signs of slowing down. The minutes mentioned that forecasters expect the purchases to increase in 2021 and 2022.

The yield on the benchmark 10-year U.S. Treasury is 0.77% up from 0.70% last week.

Next FOMC meeting is Nov. 4-5. No action expected.

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