Fed: The Hippocratic Meeting

Published on December 16, 2020

Federal Reserve Chairman Jerome Powell followed up today’s policy statement of the Federal Open Market Committee’s December meeting laying out a calmly communicated monetary policy path that will be as accommodative as needed “for as long as it takes until the job is well and truly done” — a truly “do no harm” statement and presser.

The highlights for us were:

** As we expected (SGH 11/23/20, “Fed: The Minutes and the December Meeting”), there was no further easing by lengthening the average maturity of treasury purchases. But Chairman Powell did note “circumstances could shift that warrants our doing that, including by adjusting purchases,” reinforcing statement guidance that “[t]he Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”

** If anything, though, to our ears, he introduced a note of skepticism on the exact means and execution in extending duration as the Bank of Canada did by reducing the total purchases at the same time. Whether he was thinking solely in terms of backing away from reducing the volume of purchases, or changing the duration, or doing them at the same time, is unclear. But it suggests the bar might be a bit higher than assumed by many in the markets on tinkering with the asset purchases.

** For now, nothing we heard today pushes us away from thinking any additional accommodation is unlikely until probably the March FOMC meeting, if needed. Likewise, conceptually, we continue to think changes to balance sheet policy will primarily be to temper a “premature” rise in real yields that could threaten to excessively tighten financial conditions as the economy is rebounding, rather than to push yields lower. The distinction is important because financial conditions are amply accommodative, and yields may rise for the right reasons.

** We also expect changes in balance sheet policy will depend on fiscal policy taking the lead in driving demand and reaching those parts of the economy devastated by the Covid pandemic – it certainly isn’t the interest rate sensitive sectors — and, we suspect, after there is a degree of cooperative understanding between the Fed and Treasury to foster a high pressure economy focused on the labor market gains.

** The Committee, also as expected, tweaked the balance sheet guidance, shifting to an outcome-based threshold for continued asset purchases until “substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” As they did with refinements to the September rates guidance, Fed officials are likely to flesh out what “substantial further progress” means, even if Chairman Powell pointedly declined to do so today.

** It was also noteworthy to us just how inertial upward inflationary pressures are still expected to be. The median for core inflation is still no higher than 2% by 2023 – and that with real growth marked up across the forecasting horizon and unemployment all the way down to 3.7% – with no rate hikes. “There are significant disinflationary pressures around the world,” Powell noted. “It is not going to be easy to have inflation move up.”

** One last thing that caught our attention is how fewer Committee members see the balance of risk weighted to the downside compared to September. At the same time, a few more than half view risk as broadly balanced for economic activity even if risks on inflation are still skewed to the downside. It will be interesting to see if any strong upside surprises to growth next year alter the Fed’s assumptions on inflation.

** Or more to the point, the Fed’s new framework and its highly dovish policy stance will be truly tested by the market in such an upside scenario, perhaps at some point next year. But until then, Chairman Powell did as well and as smoothly as could have been asked of him in today’s presser to close what has been a truly tumultuous year.



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