Comments on Fed Chairman Powell’s Press Conference

September 16, 2020

The fact that two dissents were cast against the forward guidance did not get raised in Q&A until late in the press conference and elicited an unconcerned response from the chairman, who observed 1) that the dissents represented opposite sides of the policy spectrum, 2) that all committee members were in favor of a restructured approach to meeting the central bank’s twin monetary¬† policy mandates, and 3) that no other central bank has adopted the Fed’s average inflation targeting approach. Being totally new and untested, it natural and healthy that there wasn’t total unanimity on the best articulation of forward guidance within the new framework.

Powell repeatedly called the newly adopted forward guidance a powerful signal. While in line with what earlier revelations had shown and therefore not varying from financial market expectations, he does anticipate that the new wording over the longer term to augment economic expansion.

Three conditions must be met before interest rates begin to be tightened. The first is the achievement of maximum employment, a concept that encompasses a whole range of matters, higher labor market participation, much lower unemployment, which was at 3.5% before the pandemic but is 8.4% now, and broadly stronger wage pressure shared across segments of the labor force. Secondly, inflation needs to rise to 2.0%, which is unlikely to happen before 2023 at the earliest, and thirdly, officials need to be confidence that inflation is on track to surpass the 2.0% target to a moderate degree for “some time.” All these hurdles drives a wedge between the automaticity between unemployment falling below some threshold and the Fed being compelled to tighten policy.

Several questions pertained to fiscal stimulus: does the Fed statement assume another fiscal stimulus package, would forecast growth and inflation be different if that didn’t happen, is the Fed essentially out of ammo, what happens if a widely available and credible vaccine takes longer to develop than hoped? Fiscal policy is a delicate political minefield for any Fed Chairman. Powell did credit the speed and force of earlier fiscal support. He also repeated that the Fed can lend, but only politicians are authorized to spend, adding that getting all parts of the labor force redeployed is bound to be a very lengthy process and dependent upon government policy assistance. Regarding the vaccine, Powell said there are ways in the meantime for aspects of economic activity requiring social gathering to learn to live with Covid, and that such in part is happening.

From the release of the Fed statement to shortly after the press conference’s end, U.S. share prices lost some modest ground and did the dollar’s euro translation value. The ten-year Treasury yield rose a couple of basis points. The price of oil firmed a bit, and that of gold slipped marginally.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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