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

FS Insight Team

When Fed Minutes are released and the market doesn’t react that’s generally a good thing. Despite the mini-tantrums of the first quarter over rates, the news from the Fed this week appeared to help rates settle down, which may have helped the mega-cap technology names regain some of their wings. The Federal Reserve released the meeting minutes from their recent mid-March meeting on April 7th. The Fed changed its tune very little, despite recent expression of some optimism in other forums. For instance, it continued to stress that it will both keep interest rates near zero and continue the current rate of asset purchases until “substantial further progress” has been made toward the targeted levels for employment and inflation. Importantly, the Fed will also view temporary price increases associated with the unprecedented and widescale opening of the economy as temporary.

We may have forgotten with everything else going on that the Fed is still providing unprecedented policy support. They are saying they will not try to slow down the economic boom that is coming until maximum employment and inflation targets have been reached. It becomes clearer and clearer with each official Fed communication that a key feature of the new Adjustable Inflation Target (AIT) framework is the willingness to be behind inflation rather than ahead of it. This is a significant departure from past Fed behavior and it essentially means that the neighbors are all on board, and loud music and many punch bowls will be permitted, from a monetary perspective, until the wee hours of the morning. This is indeed unprecedented and surely is bullish, at least in the short and medium term.

According to the minutes, the size of The American Rescue Plan was larger than expected. In their January projection they had thought a smaller package more likely. This has resulted in a more positive economic outlook. In fact, the Fed is projecting the strongest growth in nearly half a century. Nonetheless, the independent agency is communicating cautiously and steadily to ensure the substantial progress made since last March is not forfeit.

Federal Reserve Chairman Jay Powell spoke on Thursday during meetings at the International Monetary Fund and the World Bank. Although the Chairman mentioned the brighter outlook on the horizon for the US economy he cautioned listeners that the post-COVID-19 economy would be different and that he would be focused on ensuring the millions of people who lost their job as a result of the pandemic will be able to find work. He said he thinks that the America is “on track to allow a full reopening of the economy fairly soon.”

The New York Fed is looking at broadening the number of firms it does business with to implement monetary policy. Lorie Logan, who manages, the Open Market Account holdings of securities and cash (worth $7.7 trillion) said on Thursday that the bank is looking into doing business with a broader range of firms than it has traditionally. Her focus is on the overnight repo rate which sets the low-end in transactions with qualifying firms. By expanding the amount of counterparties able to participate, Ms. Logan hopes a “more vibrant and effective marketplace’ could strengthen the effectiveness of monetary policy. 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 1.66%.

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