Chairman Powell Testifies, Fed Payments System Goes Down
Chairman Powell Testifies, Fed Payments System Goes Down
Federal Reserve Chairman Jay Powell testified on consecutive days before the Senate Banking Committee and the House Financial Services Committee, respectively. Chairman Powell, as he so often does, stuck closely to the script and tried to bob and weave his way around loaded questions and partisan punji pits. Powell has gotten accustomed to the dance and maybe even good at it. In an undercurrent you might not have necessarily noticed if you don’t watch Congressional hearings intently, Republicans kept giving Powell ‘attaboys while they were conspicuously absent from the other side of the aisle. Progressives are already calling for a candidate more in their ideological lane when Powell’s term expires in about eleven months.
Powell was asked whether he thought asset bubbles were forming. He said it was a ‘a very mixed picture’ and that some areas of the market exhibited potentially excessive valuation levels, while other important areas for financial stability like leverage and funding risk remained quite healthy. As a demonstration of the dynamics referenced in his remarks, even though there was chaos in bond markets this week as yields rose rapidly, the Stable Overnight Funding Rate (SOFR), the interest rate benchmark that has finally replaced the tarnished LIBOR, hit new lows of .1% this week in stark contrast to the other end of the curve.
When the Fed is on the spot as much as is it is this week it is quite natural for the Governors to take a concerted messaging effort in order to maximize their assuaging effects. Governor Lael Brainerd gave a web-casted lecture at Harvard entitled How Should We Think about Full Employment in the Federal Reserve’s Dual Mandate? She gives an extensive explanation of how changing economic relationships over the past decade have led inflation to trend significantly below target and to become insensitive to resource utilization. She, like Powell, thinks the Fed could be as much as 3 years away from target.
As James H. Stock recently pointed out in his Foreign Affairs article, The Rate Debate, during the 1990s recession for each percentage point increase in unemployment inflation fell by 0.8%, in the 2000 recession that figure was 0.4%, during the Global Financial Crisis it was 0.3% and in the most recent recession it was 0.1%. So, as you can see the Fed is quite confident in the data underpinning its new framework and this is why Powell can so confidently proclaim before Congress that inflationary forces are unlikely ‘turn on a dime.’
A chorus of other officials including even the relatively hawkish Mr. Bostic echoed Powell’s sentiments that they were not concerned about the rate-rises and, in fact, view them as evidence of a strong recovery on the horizon.
In perhaps one of the best real-time displays as to why a ‘digital dollar’ might have utility, the antiquated but incredibly essential payments infrastructure maintained by the Fed went down for a few hours. The ACH and several other crucial interbank functions were affected.
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 1.407% up from 1.34% last week. On Thursday, it briefly went above 1.6%.
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