Powell Sees Recovery Ahead of Schedule, Bank Dividends to be Restored In June

FS Insight Team

Federal Reserve Chairman Jay Powell has begun the slow process of changing communication from the very necessary ‘man your battle-stations’ mentality to one more aligned with what is looking like will be a very robust post-pandemic recovery. He acknowledged that the economy is recovering more quickly than the Federal Reserve initially expected largely because of the impressive pace of vaccinations and the massive amounts of fiscal stimulus.

He also acknowledged that the strength will eventually create a situation where the Fed can pare back the extensive and unprecedented support it has given to the economy. In a live interview with NPR’s morning edition Powell stressed that only after substantial further progress will he be willing to begin tapering asset purchases. The lessons of 2018 are still fresh on his mind, so investors should not read this as an impending end to liquidity. It decidedly is not.

He defended the unprecedented actions of the Fed and said they likely staved off far worse outcomes. Powell likened the crisis response to the emergency evacuation of the British Expeditionary Force from Dunkirk. This takes us to our ‘post-war’ metaphor for what the economy will do when re-opening hits it’s stride. So does the Fed apparently since it’s new economic projections are for the highest rate of economic growth in nearly half a century at 6.5%

“In a nutshell, it’s a combination of better developments on Covid, particularly the vaccines, and also economic support from Congress,” said Chairman Powell before elaborating that these developments will enable us to open the economy sooner. Powell did mention that current rates of spending, although necessary, are certainly unsustainable. While the current low rates are preventing government debt from crowding out private sector spending, this relationship will not be in place forever.

Last summer, in the Fed’s supervisory capacity it had placed limits on dividends and buybacks for banks so that they could conserve capital during the unprecedented lockdowns and cessation in commerce caused by COVID-19. In a further sign that the Fed sees economic conditions improving it has lifted it’s temporary limits on dividend payments and share buybacks for most banks effective on June 30, 2021.

The recent stress tests showed strength at banks supervised by the Fed and this action show that banks continue to be a source of a strength. Loan loss provisions at banks also show that their assessment of risk is that the worst from the pandemic and associated economic fallout is behind us.

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 1.67% up from 1.73% last week.

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