Shelton Again Nominated; Consensus on Asset Purchases
Shelton Again Nominated; Consensus on Asset Purchases
President Trump reintroduced the recently rejected nomination of Judy Shelton in the United States Senate on January 4th, the first day of the new legislative session. Obviously, the subsequently occurring Capitol Riot has made the prospect of success about as near-zero as it can be, even though chances were slim prior to the tragic and unsettling event.
Minutes were released from the December 15-16th Federal Reserve Open Market Committee (FOMC) meeting, and while they certainly showed that the body is wary of increasing headwinds due to the worsening healthcare situation, they also showed that most Fed governors remain firmly confident of a robust post-pandemic recovery. There was unanimous consensus, a rare thing in Washington indeed, about an ‘outcomes based’ approach to curtailing asset purchases. Essentially, the Fed went out of its way to tell the public that it will do all it can to avoid a repeat of the 2013 ‘taper tantrum’. This removes the prospect of what could otherwise be a nasty downside surprise. The minutes also showed only limited support amongst committee members for purchasing longer-dated US Treasuries as the Fed did in the wake of the 2008-2009 Global Financial Crisis.
Senator Brown (D-OH) will become the new Chairman of the Senate Banking Committee after the dual Democratic victories in the Georgia Senate run-offs. We will keep you posted on how the Democratic control of the Senate could affect the relationship between fiscal and monetary authorities. There has been murmuring both inside and outside the Fed of revamping financial regulations. Expect one of the first targets of the Dems to be the recently stripped-down Community Reinvestment Act (CRA).
Aside from this major change on the Fed’s most relevant congressional committee, some Federal Reserve members have openly spoken positively about what the prospects for more robust stimulus mean for monetary policy’s effectiveness. Despite the concern of short-term headwinds, a definite bullishness could be detected in the comments of some Fed Governors, like when Jeremy Bullard of St. Louis said this week that “The ingredients for higher inflation are in place, you have a powerful fiscal policy in place and perhaps more to come,” he said before also predicting that the economy is ‘poised to boom’ after the pandemic. Encouragingly, Richmond Fed President Barkin also said that he saw the recent rise of the 10-year yield above 1% as a positive. He said it represents positive inflation expectations from investors and not worrisome financial tightening.
One of the things these minutes and recent comments from Fed Governors have confirmed is just how dovish the body has become. Loretta Mester, President of the Cleveland Fed, usually advocates for higher rates than the rest of her colleagues. Even she said that she would find 2.5% inflation acceptable. Charles Evans of the Federal Reserve Bank of Chicago said that he would be amenable to what would have been previously considered the astronomical figure of 3% inflation. Evans also importantly said that concerns about future asset bubbles should be addressed through supervision and regulation, not the agency’s dual mandate.
Asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries. The benchmark yield on the 10 year is 1.13% up from last week 0.93% last week.
