Fed Holds Course Steady, Powell Opines on Financial Stability
Fed Holds Course Steady, Powell Opines on Financial Stability
The Federal Reserve held its first meeting of 2021 and announced that it will maintain its accommodative posture toward monetary policy and keep interest rates near-zero. The Fed’s statement had some significant language changes including noting that the economic and employment activity had significantly moderated.
The Fed also noted that those sectors most adversely effected by social distancing and the pandemic are struggling the most. Chairman Powell also noted that unemployment rate, when calculated to include those who have also left the workforce is near 10%.
The tone of this announcement was largely the same as previous meetings. Again, the Fed highlighted that there are still considerable and plentiful downside risks to the economy as we proceed through a deadly and uncertain winter. The language of this statement was also similarly tweaked with a focus on the monitoring of vaccines. The other big language change, which could be taken as a positive, was the Fed replacing taking out the ‘medium-term’ of the period where the virus poses the most risks. Powell expanded on the change, clarifying that due to vaccine developments, “The risks are in the near-term, frankly.’
Of course, what made more headlines during this wild week on Wall Street was Powell’s answer to the first question he received about the short-squeezes and volatility occurring on Wall Street. Powell avoided the issue directly and instead spoke to his assessment of financial stability in general. The questioner has noted that the Fed’s macroprudential tools primarily apply to banks and their supervision but does not cover non-bank entities. Powell was asked about the risks he saw in these non-bank areas.
He noted that the Fed does not directly supervise non-bank entities, other than those designated as Systemically Important Financial Institutions (SIFIs) but that through the Financial Stability Oversight Council he coordinates with agencies that do. He also noted that a lot of the risks that made themselves apparent in the Global Financial Crisis appeared in the non-bank sector and the Fed has learned valuable lessons from that. He did not seem to indicate that new tools or more nuanced approaches to the non-bank sector were needed.
He generally opined that the macro-prudential tools had been quite useful. He pointed to the strength of the banking system in February and March as evidence of the effectiveness of their tools. He stressed that for matters of financial stability, tools other than monetary policy are most effective. He said, very importantly, that he thinks preliminary tapering or ‘cooling’ to fight asset bubbles is not proven to be positive and may actually cause more harm than good.
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 is1.07% down from last week 1.09%.
