With the conclusion of the Federal Open Markets Committee on Wednesday, the resulting virtual press conference focused on answering questions on tapering the trunk fulls of asset purchases designed to keep money in the US pipeline.
All eyes had been centered on this question, for days, preceding the announcements and the $120 billion in government backed bonds, and $40 billion in mortgage backed securities gave economic pundits and economists a run to press on Thursday.
Set against the background of inflation which had hit record highs of 5.4 percent in a year over year comparison; it was the highest figure since 2008, and created a sense of urgency among the FOMC and increased pressure on Chair Jerome Powell, whose sense of caution gave alarm amongst those whose confidence in him was weakening.
With consumer spending driving the economy as usual, there was a heightened sense that there might be an overheating, with people sitting on piles of unspent cash during the nationwide lockdowns, and federal stimulus checks fattening those reserves.
Sandwiched between the inflationary worries, and the actions of the FOMC, observers were also concerned as consumers switched from spending on goods to services, and with the increase of vaccinations for Covid, travel and leisure, further increased inflationary fears.
Powell had the unenviable task of going in one direction, tapering the pile, or defining a new direction. With the latter he defined a new normal of accepting higher inflation, to make up for the periods when it was less, and the decision to stall tapering towards the Fall, or even later.
This gave him, and other members, who might have been uneasy about the timeline, a softer cushion to land on; and, one that allowed the Fed to be consistent with its twin mandate: keeping inflation, at or near 2.0 percent, and focusing on full employment.
Taking the virtual bull by the horns, at the press conference, Powell added that “the economy has made progress to all two goals.”
As predicted there were some fears that the past might be prologue with the memory of the 2013 model of tapering “in modest, equal amounts over the course of 10 months,” according to the Wall Street Journal, but noted the subsequent reaction: a spasmodic market..
No one really expected the Feds to raise its key interest rate, from its current 00.25 %, and Powell declared, “it's’ not something that is on our radar screen right now.”
Much like a Greek Chorus, there were the cries by some to do an equal reduction of both Treasuries and mortgage backed securities, to stem the tide of high home costs homes.
That appeal was nixed when Powell said buying long for these assets was the key. And, if that was disappointing to some, then his reaction to the increasing bottle neck of the supply chain and its attendant problems; (for example, the dearth of semiconductors), had him stating that in time, these problems would resolve themselves, proved to be equally dispiriting to many economists.
Hovering in the background was King Covid, but now its cousin The Delta Variant became an increasing concern for many, especially as the Fall was expected to bring workers back to the office and their children back to in person learning.
His reaction? “We’ve kind of learned to live with [it].”
In a veiled remark Diane Swonk, chief economist of Grant Thornton said to the Journal if that was the case then his leadership should compel him to consider “tapering by year’s end.”
Consistent with his prior remarks, but further urging caution, Powell said, “there’s absolutely no sense of panic.”
Asking all to accept this, including the new normal of higher inflation, he said, simply, that it, “will be more persistent.”
Was this enough to stem the fears of the American public who in a recent poll said that 54 percent of Americans felt the economy was tanking? That said, only time will tell.
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