Federal Reserve Update

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When Jay Powell delivered a speech at the Jackson Hole Symposium on Friday, his high-profile behavior since he took the helm of the U.S. Central Bank in 2018 was once again fully demonstrated.

After striking a balance between strong economic expansion, soaring inflation and soaring asset prices with the rapidly rising Covid-19 cases, and the fact that the number of unemployed persons has increased by nearly 6 million compared to before the pandemic, the Fed Chairman has taken steps to reduce monetary policy. One-step stimulation, while conveying a steady enough pace to avoid fireworks.

Although Powell stated that the $120 billion monthly asset purchase plan that has driven a historic rebound in financial markets since the worst of the coronavirus crisis will be Withdraw Since the beginning of this year, U.S. stocks have soared to new highs, and Treasury bonds have soared.

For a long time, the Fed has stated that it will maintain this bond purchase speed until it achieves an average 2% inflation and employment maximization goals and achieves “substantial further progress.” On Friday, Powell announced that he had reached the first of these thresholds and had made “significant progress” on the second threshold.

“This is as balanced as Powell’s expectations,” said Raghuram Rajan, a professor at the University of Chicago Booth School of Business and former president of the Reserve Bank of India.

More and more Fed officials support the rapid withdrawal of policy support, which makes Powell’s task more complicated. Before the chairman’s speech on Friday, “HawksThe factions of the Federal Open Market Committee have redoubled their calls for downsizing in order to begin to withstand higher inflationary pressures and avoid turning a bubble financial market into a more worrying bubble.

Kansas City Fed President Esther George and St. Louis’ James Brad support more direct measures, while Atlanta Fed President Rafael Bostic said that the scale of reduction should begin in October.

Loretta Mester, chairman of the Cleveland Federal Reserve and voting member of the next year’s policy-making committee, told the Financial Times on Friday that she supports the end of the scale reduction in the second half of 2022 in order to allow these purchases and interest rates to rise.

“I hope to complete the asset purchase before we even start thinking about how to deal with interest rates,” she said.The middle of next year gave us plenty of time to deal with [the data] Before we consider lift-off. “

Although Powell did not specify a specific reduction schedule and reiterated his view that although supply chain restrictions last longer than many people expected, the recent rise in US consumer prices will subside over time, but His concessions to reduce asset purchases this year will help further unify the Fed, which has been a divided Fed in recent months.

“His main achievement [on Friday] It is he who respects the wishes of the committee,” said Vincent Reinhart, a former Federal Reserve economist and current chief economist at Mellon University.

He is making these very fine-tuned, difficult and complicated decisions, because every word he says is actually a fact of the Biden administration auditioning for the next term.

But Powell emphasized that the imbalance of economic recovery, the need for further advancement in employment, and the risks of premature tightening of policies will help maintain the Fed’s flexibility to slow down the pace, especially as concerns related to the delta have become A more prominent case, economists said.

“What we are seeing is an unusual combination of labor market chaos and inflationary impulses. This impulse seems unlikely to last for a long time. In this case, the central bank that quickly pulled the trigger to cancel the easing policy may be committing serious policies. Wrong,” said David Wilcox, a senior researcher at the Peterson Institute for International Economics and a former Fed staff member.

“The Fed needs extraordinary patience, perseverance, and a lot of credibility to wait for inflation to abate as they expected and labor market chaos to subside so that we can get closer to pre-pandemic conditions.”

Nathan Sheets, chief economist of PGIM Fixed Income and former deputy secretary of the U.S. Department of the Treasury, stated that Powell also successfully prepared investors for the final policy shift in Jackson Hole, so that the gradual reduction gradually became a “non-event” “.

Investors have already expected the Fed to announce in November to prepare for the start of December. The interest rate hike is even further, especially considering Powell’s insistence on Friday that any reduction in the timetable will not provide a “direct signal” for when the Fed will raise interest rates.

Ellen Zentner, chief U.S. economist at Morgan Stanley, said: “The failure to separate these two policy initiatives led to the reduction panic in 2013,” referring to Ben Bernanke, then chairman of the Federal Reserve. After the hint surprised the market, the market fluctuated wildly. In reducing irritation. “The Fed has learned its lesson and it needs to provide clear communication before policy changes.”

Another complex issue facing Powell is the ongoing debate about his future at the Fed. His four-year term will end in early 2022, and the Biden administration is discussing whether it will reappoint him or acquiesce in the more progressive Democrats demanding his replacement.

PGIM Fixed Income’s Sheets said: “He is making these very fine-tuned, difficult and complicated decisions, because every word he says is actually an audition for the Biden administration for the next term.”

Additional reporting by Kate Duguid and Joe Rennison in New York