Photographer: Stefani Reynolds / Bloomberg
Photographer: Stefani Reynolds / Bloomberg
Federal Reserve staff members made a potentially more troubling assessment of risks to financial stability at the central bank’s political meeting last month than the one publicly presented by President Jerome Powell.
Speaking to reporters on Jan. 27 after the Fed’s last policy meeting, Powell generally called vulnerable to “moderate” financial stability. Central bank staff made a less bloody assessment in their presentation at the January meeting, and told policymakers that the vulnerabilities in balance were “remarkable,” according to the minutes of the rally published on Wednesday.
Powell agrees with the general staff assessment, but only spoke more generally to reporters than the granular approach taken by Fed economists in their presentation to the Federal Open Market Committee, according to a Fed official familiar with the question.
The Fed’s assessment of financial stability risks is important because it can play a role in determining the central bank’s stance on monetary policy and its focus on financial regulation. If policymakers feel that the weaknesses of the financial system are high, they can tighten the rules governing banks or even raise the costs of debt to try to curb the excesses they see.
Fed officials showed no sign at last month’s meeting of wanting to withdraw soon from their support for the pandemic-hit economy and financial markets. According to the minutes of the meeting, they hoped it would take “some time” before they met the conditions to reduce the mass purchase of bonds.
The Fed currently buys $ 120 billion in assets a month ($ 80 billion from the Treasury and $ 40 billion in mortgage-backed securities) and is committed to maintaining that pace until it makes “substantial progress” toward to its targets of maximum employment and 2.% inflation.
Read more: Fed officials saw the pace of bond buying continue for “a while”
The question of when to start reducing those purchases could arise later this year, as the economy gathers a wider distribution of vaccines to fight Covid-19 and even more federal government spending, observers said. the Fed. This could be particularly the case if the stock and asset markets continue their seemingly inexorable progress and already loose financial conditions shrink.
In their detailed presentation to the FOMC last month, Fed staff “rated asset valuation pressures as high,” their highest risk characterization. With the support of the central bank’s monetary facility, the S&P 500 stock market index has risen 75% from the lows reached in March when the pandemic began. Corporate bond spreads have also declined, with yields on riskier debt falling below 4% for the first time earlier this month.
In terms of household and business balance sheets, Fed economists noted the vulnerabilities on this front as remarkable, “reflecting an increase in leverage and a decline in income and earnings in 2020.” It was seen that the big banks were in good shape.
Powell has in the past highlighted the dangers that excessively high asset prices and other financial vulnerabilities can pose to the economy. In 2007, it was the bursting of a real estate market bubble that toppled the economy. In 2001, it was a collapse in technology stock prices that helped lead to a recession.
The Fed chairman defended the central bank’s easy monetary policy at its Jan. 27 press conference, saying it was justified, as payrolls are about 9 million fewer workers than they were before the pandemic.
He also argued that the rise in stock prices in recent months had been motivated more by fiscal policy and vaccine development and dissemination than by the Fed’s monetary stance.
“I would say financial stability vulnerabilities in general are moderate,” he said.