Powell Opines on Employment, Potential New Nominees
Powell Opines on Employment, Potential New Nominees
On Wednesday, Federal Reserve Chairman Jay Powell spoke at the Economic Club of New York. Firstly, the Fed Chair stressed that the Federal Reserve, counter to much media speculation, will remain patiently accommodative. He noted that transient inflationary forces likely to accompany an economic normalization would be very unlikely to affect monetary policy. He stressed that the labor market's damage is far worse than the headline unemployment rate would indicate and said the ‘real’ rate is about 4% higher at 10%. He also mentioned that we had seen the largest decline in labor force participation since shortly after World War II.
One thing is clear; the Fed is more focused on unemployment rates coming down and the more equal gains that correspondingly occur across the economy, then adhering to the more 'hawkish' approach of preliminarily raising to cool an overheating economy. This is theorized to curtail the length and severity of asset bubbles, but Powell has recently questioned this logic. He is full-speed ahead on monetary accommodation and will let inflation run high. Tapering will not be occurring any time soon though.
Markets appeared to get the message pretty clearly this time. The yield on the 2 -year treasury briefly touched levels below .1% before finding support at the .11% level. Nonetheless, inflation expectations are rising. More and more speculate that the $1.9 trillion Biden stimulus may overheat the economy, including the Fed-Chairman that never was, Larry Summers, who penned an op-ed on the subject.
The Biden administration is the first Democratic administration to leave Mr. Summers out of its' plans for decades. The more neo-liberal economic wing, which had prominence during Obama's tenure, appears to be decidedly out of favor. Political dynamics aside, it’s worth a read, even if it's mostly an exercise in acquiring attention and waiting in the wings in case of a policy error. The other Fed 'hawks' like Bostic have been making rumblings as well. Powell's comments seem wisely directed toward the policy mandates labor-side in a clear sign he knows how to sing the right tune.
Although it is early in the process, we got our first insight into President Biden's thinking on the Federal Reserve appointment he needs to fill. The two whisper candidates are Lisa Cook, a veteran Obama-admin economist. Currently, a professor at the University of Michigan, and William Spriggs, who was previously Chief Economist of the AFL/CIO and currently teaches at Howard University. Cook would be the first African American woman to serve on the Fed board. William Spriggs would be the fourth African American male to serve.
The Federal Reserve released its 2021 Stress Test Scenarios. The US's largest banks have to complete these tests to regulators' satisfaction to pay a dividend. The hypothetical 'severely adverse' scenario features a panic in commercial real estate and corporate debt markets. This leads to a 55% drop in equity prices, a 4% increase in Unemployment and an identical decline in GDP over several quarters. It’s incredible to think we've recently survived a scenario far worse than anticipated by the pre-COVID-19 stress tests. Institutions have recently passed with flying colors, and we would expect the same to occur with the 2021 tests as cyclical forces continue to move in banks’ favor.
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 is1.21% down from last week 1.17%.
