Fed Board Warns of Virus Risks, Leaves Policy Unchanged
Fed Board Warns of Virus Risks, Leaves Policy Unchanged
The Federal Open Market Committee (FOMC) concluded its meeting November 5th. Given that the United States election has yet to be fully tallied as we went to press, interest in the Fed announcement was a bit muted compared to usual. In an address to the media, Chairman Jay Powell acknowledged some impressive strength in recent economic numbers, notably in housing, but he mostly stressed the severe threat that the virus poses to the continued economic recovery.
He said that the pace of economic recovery had moderated and urged Americans to take steps to protect themselves from COVID. At the FOMC meeting in September, the governors laid out a plan to give unprecedented monetary support to the economy by creating stringent criteria for raising rates.
The criteria are a healthy labor market moving toward maximum employment, an annual inflation rate of at least 2%, and forecasts that inflation will (in the future) moderately run above 2%, in line with the new AIT framework. The Fed's new statement remained steadfast in its commitment to these criteria, which many believe effectively amounts to guaranteeing low-bound rates for the next three to four years, maybe even longer. The Fed noted in their statement that inflation is abnormally subdued partially due to energy prices.
From CNBC, Steve Liesman asked Chairman Powell why the Fed was continuing quantitative easing despite the improvement in financial market function. Powell responded that asset purchases were not only made by the Fed solely to stabilize financial markets but also to support economic activity. Despite claims to the contrary from former Fed officials- he also mentioned that the Fed is far from out of firepower. He strategically included that a key consideration of the recent meeting was how to expand asset purchases to be even more accommodative if necessary by expanding the already huge numbers involved. In his typical reassuring tone, he said: "We have a habit of keeping things in place a while."
This may be a good thing. In mid-October at a virtual discussion Governor and Vice-Chair of Supervision Randall Quarles speculated that the enormous monthly purchases of Treasuries by the Fed, around $80 billion, may not be able to be sufficiently absorbed by the private sector in the event of market declines. He said it was an 'open question' whether or not the Fed's participation was indefinitely required for US treasury markets to function effectively. In other words, emergency powers taken to respond to this crisis may already be becoming a regular fixture. I guess it's better to have the Fed continue to do it for now, rather than getting an answer to that 'open question' that we don't want. However, the crisis response of today will inevitably become the burden of tomorrow's earners.
Asset purchases remained at $40 billion of Mortgage Backed Securities (MBS) and $80 billion of Treasuries every month. The Fed Balance Sheet is just over $7 trillion, and the yield on the benchmark 10 year is 0.82% down from 0.87% last week.
