Jay Powell faced a tricky moment in handling the monetary response to the pandemic on Wednesday, after a year of crisis-fighting interventions to combat its economic fallout.
The short-term outlook has been deteriorating due to new coronavirus surges, leading some economists and investors to call for a big new easing step from the US Federal Reserve.
But the picture for later in 2021, and the central bank’s own forecasts, have been improving amid brighter vaccination prospects, suggesting stronger action was unnecessary.
In a delicate balancing act, the Fed chairman held off on a big boost to the central bank’s asset purchases, but introduced guidance that will keep them in place for a longer timeframe. This preserved Mr Powell’s dovish credentials and the sense that the Fed remains in the fight for the long term, soothing investors.
“The Fed is sending a signal that they are highly committed to achieving a complete recovery and they won’t stop providing accommodation until they have sufficient evidence that the recovery is indeed complete,” said Michelle Meyer, head of US economics at Bank of America. “It means that asset purchases, which is incremental easing, will persist — so I think [Mr Powell] sent a very strong message in that regard.”
Specifically, the Federal Open Market Committee said it would continue to buy $120bn of debt per month until “substantial further progress” was made towards its goals of price stability and maximum employment, targets that may not materialise in the post-pandemic economy for a very long time.
The fact that the clearly dovish guidance on the duration of the asset purchase programme was not paired with a boost to the aggregate size or a shift in the composition of the bond buying towards longer-dated maturities still disappointed some economists who believe Mr Powell should not be pulling any punches.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, called it a “missed opportunity” at a time when the recovery is fading quickly. “In short, this is a micro-easing,” he said. “We appreciate that the start of vaccination makes the 2021 outlook brighter . . . but in the near term the economy needs all the help it can get.”
Yet investors did not balk at the FOMC’s cautious approach — and during the press conference, Mr Powell showed no signs of prematurely declaring victory over the coronavirus-battered economy.
He repeatedly stressed the Fed’s willingness to take additional action, including on asset purchases, if needed; brushed off any suggestion that the US central bank might turn the other way and start tapering its bond buys soon; and said any inflation increase after coronavirus restrictions are lifted might be transient.
Mr Powell and other Fed officials are still expecting a drawn-out and difficult recovery, with the median policymaker predicting no rate increases until at least the end of 2023. But they are somewhat more bullish about the medium-term outlook for the US economy than they have been in the past. They upgraded their estimates for gross domestic product in 2020 and 2021, and saw a better unemployment rate — of 5 per cent — at the end of next year, than they did in September.
“In the second half of next year . . . the economy should be performing strongly,” Mr Powell said during the press conference. “We should be getting people back to work, businesses should be reopening and that kind of thing. The issue is more in the next four or five months, getting through the next four or five or six months,” he said.
In defending his decision not to be more aggressive now on asset purchases, Mr Powell acknowledged the limits of the Fed’s capacity to affect the near-term economic picture, particularly now that interest rates are already close to zero.
Monetary policy works with a lag, he said, and anyway financial conditions are already healthy.
“We don’t think the economy suffers from a lack of highly accommodative financial conditions, we think it’s suffering from the pandemic,” Mr Powell said.
He also suggested that fiscal policy was far better suited to deliver help over the coming months. With Congress moving closer to a $900bn package that Mr Powell described as potentially “very good” for the economy, that piece of the puzzle had a better chance of falling into place.
“Until we get fully vaccinated, there are limits to how much monetary policy can help people who can’t pay their bills,” said Michael Collins, senior portfolio manager at PGIM Fixed Income. “Fiscal policy can fill that need much more quickly and much more adequately than monetary policy alone.”
Mr Collins added that the Fed had simply not seen enough “dislocation” to be more forceful on asset purchases. “If financial conditions start to weaken and interest rate-sensitive parts of the economy start to weaken, maybe they would step in.”