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Comment: Chair Powell’s semiannual monetary policy testimony covers familiar ground

I didn’t hear anything that struck me as genuinely fresh on the outlook for monetary policy in either day of Chair Jerome Powell’s semiannual monetary policy testimony. In fact, I don’t think I hear much about monetary policy per se. There was a lot about the credit facilities and the need to stabilize financial markets and use the Fed’s powers as lender of last resort.

Powell – in his role of spokesman for the Federal Reserve – said:

  • Current monetary policy was appropriate,
  • Rates are anticipated to remain near zero for a long stretch as seen in the Summary of Economic Projections (SEP),
  • Asset buys and forward guidance are and will the main tools of unconventional monetary policy during that period,
  • The Fed is exploring yield curve targeting as one possible additional tool,
  • The use of negative rates is an option not presently being contemplated and unlikely to be deployed.

Powell leaned into the Fed’s recent decisions as ones designed to fulfill the dual mandate and mitigating harm to the labor market in the wake of a public health emergency on a huge scale. He repeatedly defended buying of assets as one way to help the functioning of the economy. He acknowledged that the Fed’s holdings of Treasurys and Agency MBS were at uncomfortable levels that far exceeded the peak at the end of the third asset purchase program (LSAP, or so-called QE3). At the same time, the response to the COVID-19 crisis required it as a way to ensure that credit markets continued to operate. Along with the institution of a series of liquidity facilities – some designed to work with the CARES Act – the Fed ensured credit could reach all levels of business and state and local government where it was needed. Powell’s assessment of the economic outlook was not excessively gloomy, all things considered, but it was cautious and consistent with another attenuated recovery after a crisis.

At the heart of Fed actions during the pandemic is the need to ensure that people keep their jobs if at all possible, and where that isn’t possible, to get them back into the labor market quickly to prevent the erosion of skills and crippling loss of income. In fact, the one thing that stood out during Powell’s testimony was that he said more than once that the Fed wants the economy to get back to a “tight” labor market. Just a couple of months ago he declined to call it tight, preferring the term “strong”. I suspect that in January or February the use of “tight” might have implied a need for rates to go up in response to a potential overheating in the economy and/or sparking too much upward pressure on wages. Policymakers were pleased with a labor market that continued to draw in workers from the sidelines and wages that were finally showing sustained upward momentum at a healthy pace.

As to the other side of the dual mandate, that of inflation, Powell said that isn’t the immediate concern. Clearly it is something Fed policymakers are going to keep an eye on. However, disruptions during the pandemic mean that normal price behavior will be harder to discern under the noisy data. It will take time for this to dissipate. And, yes, the bugbear of hyperinflation is starting to reemerge as die-hards about the relationship between money supply and the buying of assets by the Fed begin to worry. However, the Fed has demonstrated that purchases of assets do not necessarily lead to high inflation, and that they can control reserves through setting short-term rates. The Fed has also buttressed former Chair Ben Bernanke’s contention that holding assets helps support the economy via the transmission of credit.

In any case, the Fed wouldn’t be buying assets and lending this freely unless the circumstances required. The initial calming of financial markets and tentative improvement economic conditions seems to justify the Fed’s actions as the right ones to prevent worse outcomes that would be more difficult and expensive to fix down the road.

There were a number of questions about the Main Street Lending Facility as members of both the Senate Banking Committee and House Financial Services Committee were anxious that it get active. Powell was able to say that banks were now able to register to participate in the program and that credit should be available soon. Powell reiterated that Main Street businesses are diverse and have individual needs that previous credit facilities could not effectively address, but that the new facility would allow small businesses to work with banks that know them.

As usual, Powell deferred to Congress on all matters fiscal beyond saying that the deficit does matter while the current crisis requires it being expanded to avoid worse in the future.

Please see the Whetstone Analysis Reference Library for histories of Fed rate actions, asset purchases, credit facilities, and more.

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