Photographer: Stefani Reynolds / Bloomberg
Photographer: Stefani Reynolds / Bloomberg
Federal Reserve officials gave a potentially more worrying assessment of risks to financial stability at the central bank’s policy meeting last month than that publicly presented by Chairman Jerome Powell.
Speaking to reporters on Jan. 27 after the last Fed policy meeting, Powell financial stability vulnerabilities generally referred to as ‘moderate’. Central bank officials gave a less optimistic assessment during their presentation at the January meeting, telling policymakers that on balance vulnerabilities were “ remarkable, ” according to the minutes of the meeting released Wednesday.
Powell agrees with the overall assessment of the staff, but according to a Fed official familiar with the matter, only spoke more generally to reporters than the detailed approach taken by the Fed economists in their presentation to the Federal Open Market Committee.
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 approach to financial regulation. If policymakers believe that the weaknesses of the financial system are greater, they can tighten the rules for banks or even increase the cost of financing to try to contain any excesses they see.
Fed officials showed no signs at last month’s meeting that they wanted to withdraw support for the pandemic-hit economy and financial markets any time soon. According to the minutes of the meeting, they expected it would take “some time” for the conditions to be met for their massive bond purchases to be scaled back.
The Fed is currently buying $ 120 billion in assets per month – $ 80 billion in Treasury bills and $ 40 billion in mortgage-backed securities – and has pledged to keep that pace until it makes “substantial further progress” toward its goals. maximum employment and 2% inflation.
Read more: Fed officials have seen the pace of bond buying continue for ‘some time’
The question of when to phase out those purchases could surface later this year as the economy picks up steam with more widespread distribution of vaccines to combat Covid-19 and even more spending by the federal government, Fed watchers said. . This could be especially the case if the equity and asset markets continue their seemingly inexorable march and further ease already-loose financial conditions.
In their detailed presentation to the FOMC last month, Fed employees rated the pressures on asset valuation as increased – their highest risk characterization. Supported by the central bank’s easy money-keeping, the S&P 500 stock market index is up 75% from the lows it hit in March when the pandemic started. Corporate bond spreads have also fallen, with returns on the most risky debt dropped below 4% for the first time earlier this month.
As for household and corporate balance sheets, the Fed economists considered vulnerabilities on that front to be notable, “due to greater leverage and lower incomes and revenues in 2020.” Large sofas were found to be in good condition.
Powell has in the past identified the dangers that excessively high asset prices and other financial vulnerabilities can pose to the economy. In 2007, it was the burst of a housing bubble that caused the economy to decline. In 2001 it was a collapse in technology stock prices that led to a recession.
The Fed chairman defended the central bank’s loose monetary policy in his January 27 press conference, saying it was justified because payrolls are about 9 million workers short of what they were before the pandemic.
He also argued that the rise in stock prices in recent months was driven more by fiscal policies and vaccine development and dissemination than the Fed’s monetary policy.
“I would say vulnerabilities to financial stability are generally moderate,” he said.