The Fed must walk a fine line on Wednesday as financial markets hang in the balance

Federal Reserve Jerome Powell testified at a hearing on the Senate Banking Committee on ‘The Quarterly CARES Act Report to Congress’ at Capitol Hill in Washington, USA, December 1, 2020.

Susan Walsh | Reuters

It seems that a booming economy, continuous inflation and a stock market higher are not much of a recipe for easy monetary policy.

But this is the position in which the Federal Reserve finds itself.

The challenge for the central bank is to explain this position to investors and assure them that even if the status quo remains, it will not entice policymakers to change course.

“The basic rule is, ‘Everything looks a little better, but there’s still a lot of uncertainty and we’ll not be doing anything soon. “We’ll probably hear it,” said Bill English, former head of the Fed’s Department of Monetary Affairs and now a professor of finance at the Yale School of Management.

“They do want to suggest that things are better,” he said. “On the other hand, they do not want to suggest that they will change policy any time soon. It is therefore a difficult communication.”

The Federal Open Market Committee, which sets monetary policy, meets Tuesday and Wednesday, followed by a news conference by Fed Chairman Jerome Powell.

Nobody expects broadband changes. Short-term loans will remain near zero, and the Fed will continue to buy at least $ 120 billion a month in bonds to keep markets flowing and keeping financial conditions afloat.

There will be a lot of visits to investors during this meeting.

Economic projections due

Eddie Rodriguez, who works for the city of Hialeah, will be handing out unemployment applications to people in their vehicles on April 8, 2020 in Hialeah, Florida.

Joe Raedle | Getty Images News | Getty Images

For one, individual members will update their forecasts for gross domestic product, unemployment and inflation.

They last presented calculations in December before Congress approved two stimulus packages totaling $ 3 billion and before a Covid-19 vaccine that vaccinated 2.4 million Americans every day.

Goldman Sachs recently raised its GDP forecast to 7% for the full year and also sees unemployment fall faster than expected, while inflationary pressures rise.

In contrast, the Fed’s summary of economic projections in December indicated an average estimate of just 4.2% for GDP, coupled with a forecast of the 5% unemployment rate and core inflation of around 1.8%.

According to Bank of America, there are likely to be ‘significant upward revisions’.

The GDP figure can be increased by “at least” 1.5 percentage points to a range of 5.7% to 6%, while unemployment can be reduced to 4.8% and inflation can be increased to the Fed’s target of 2 %, Bank of America estimated.

Hawkish tilt possible

Jerome Powell, Chairman of the US Federal Reserve, speaks on Wednesday, December 16, 2020 during a virtual news conference in Tiskilwa, Illinois, USA.

Daniel Acker | Bloomberg | Getty Images

They do want to suggest that things are better. On the other hand, they do not want to suggest that they change their policy any time soon. So it’s a tricky communication.

Bill Engels

financial professor at Yale Business School

“This is going to be interesting, because how do you upgrade your GDP forecasts to 7% and your inflation target to 2% and your unemployment forecast to 5% and then say we’re going to be super easy,” Kathy Jones said. chief strategist for fixed income at Charles Schwab. “What they will try to emphasize is patience.”

Jones said she did not yet expect a shift in policy, and Powell stressed the importance of ” such a broad and inclusive increase in employment and a decline in unemployment as possible before even considering raising rates. . ‘

“They’re pretty comfortable waiting for it,” she said.

Engels, the former Fed official and Yale professor, said Powell would emphasize “uncertainty” despite progress with the virus and the economy.

“Part of the communication is that ‘our response function has not changed. We still want to achieve our goals, we will still be patient,'” he said. “The prospects are probably better, but the world is an uncertain place. A lot can happen.”

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