Thursday, December 17, 2020

Jerome Powell’s December 16, 2020 Press Conference – Notable Aspects

On Wednesday, December 16, 2020 FOMC Chairman Jerome Powell gave his scheduled December 2020 FOMC Press Conference. (link of video and related materials)

Below are Jerome Powell’s comments I found most notable – although I don’t necessarily agree with them – in the order they appear in the transcript.  These comments are excerpted from the “Transcript of Chairman Powell’s Press Conference“ (preliminary)(pdf) of December 16, 2020, with the accompanying “FOMC Statement” and “Summary of Economic Projections” dated December 16, 2020.

Excerpts from Chairman Powell’s opening comments:

Economic activity has continued to recover from its depressed second-quarter level.  The substantial reopening of the economy led to a rapid rebound in activity, and real GDP rose at an annual rate of 33 percent in the third quarter.  In recent months, however, the pace of improvement has moderated.  Household spending on goods, especially durable goods, has been strong and has moved above its pre-pandemic level.  In contrast, spending on services remains low, especially in sectors that typically require people to gather closely, including travel and hospitality.  The overall rebound in household spending owes in part to federal stimulus payments and expanded unemployment benefits, which provided essential support to many families and individuals.  The housing sector has fully recovered from the downturn, supported in part by low mortgage interest rates.  Business investment has also picked up.  The recovery has progressed more quickly than generally expected, and forecasts from FOMC participants for economic growth this year have been revised up since our September Summary of Economic Projections.  Even so, overall economic activity remains well below its level before the pandemic and the path ahead remains highly uncertain.  

In the labor market, more than half of the 22 million jobs that were lost in March and April have been regained as many people were able to return to work.  As with overall economic activity, the pace of improvement in the labor market has moderated.  Job growth slowed to 245,000 in November, and while the unemployment rate has continued to decline, it remains elevated at 6.7 percent.  Participation in the labor market remains notably below pre-pandemic levels.  Although there has been much progress in the labor market since the spring, we will not lose sight of the millions of Americans who remain out of work.  Looking ahead, FOMC participants project the unemployment rate to continue to decline; the median projection is 5 percent at the end of next year and moves below 4 percent by 2023.  The economic downturn has not fallen equally on all Americans, and those least able to shoulder the burden have been the hardest hit.  In particular, the high level of joblessness has been especially severe for lower-wage workers in the service sector, and for African Americans and Hispanics.  The economic dislocation has upended many lives and created great uncertainty about the future.

Jerome Powell’s responses as indicated to the various questions:

STEVE LIESMAN. Thank you, Mr. Chairman, and Happy New Year. I know how much

you enjoy talking about fiscal stimulus. So let me ask you directly about fiscal stimulus. There’s talk right now of a $900 billion fiscal stimulus program in Congress. Is that sufficient? Is that what you’re looking for? Do you think that’ll be sufficient for helping the economy? Finally, you talked about the idea of how concerning the recent surge is. I wonder if you can put some detail on that. How much concern do you have in terms of where could employment go? What could happen to GDP in the first quarter resulting the surge.  Thank you. 

CHAIR POWELL. Okay, so on fiscal policy, I would just say a couple of things. The case for fiscal policy right now is very, very strong. And I think that is widely understood I would say now. The details of it are entirely up to Congress. But with the expiration of unemployment benefits, some of the unemployment benefits, the expiration of eviction moratoriums with the virus spreading the way it is — there’s a need for households and businesses to have fiscal support. And I do think that again — I think that is widely understood. So I think it would be — I certainly would welcome the work that Congress is doing right now. It’s not up to us to judge that work. It’s really, really theirs. And I don’t have a view for you on the size of it. It’s obviously a substantial bill. On the surge, you know, so it’s a really interesting question. We have — and others too — have consistently expected there to be more economic — that growth in cases would hold back the economy more than it actually has. So we’ve overestimated the effects on the economy of these spikes we’ve been having. Now this spike is so much larger that I think — and I think forecasters generally do think that this will have an effect on suppressing activity, particularly activity that involves people getting together in bars and restaurants, on airplanes and hotels and things like that. And you’re starting to see that. In the high frequency data, you’re now beginning to see that show up. And I think if this is the case, numbers are so high, and so widespread across the country, that seems like it must happen. Now, how big will it be? We don’t really know. You know, there are a lot of estimates. The general expectation is you’re seeing some slowing now. And you’ll see the first quarter could well be — what we said is that coming months are going to be challenging. The first quarter will certainly show significant effects from this. At the same time, people are getting vaccinated now. They’re getting vaccinated. And by the end of the first quarter into the second quarter, you’re going to be seeing significant numbers of people vaccinated. And so then what will be — how will that play into economic activity? Again, we don’t have any experience with this. You have to think that sometime in the middle of next year, you will see people feeling comfortable going out and engaging in a broader range of activities. And some people will be probably quick to do that. Some are doing it now without a vaccine, right, in many parts of the country. So nonetheless, my expectation — and I think many people have the expectation that the second half of next year, the economy should be performing strongly. We should be — you know, we should be getting people back to work. Businesses should be reopening and that kind of thing. The issue is more the next four or five months, getting through the next four, five, six months. That is key. And you know, clearly there’s going to be need for help there. And, you know, my sense and hope is that we’ll be getting that. 

JEANNA SMIALEK. Hi, Chair Powell. Thank you for taking questions. I was wondering if you could talk a little bit about house prices. They were mentioned in the most recent minutes, as you know, potentially evaluation concern, especially as it related to your mortgage-backed security purchases. And you mentioned earlier today that the housing market looks more or less fully healed. And so I guess I wonder, are you worried about valuation pressures there? And if so, what can the Fed do to contain those? 

CHAIR POWELL. You know, so we monitor basically just about every asset price in the economy, and housing prices are something that we’ve been monitoring. And you see them moving up. You see very high demand. This is the housing market that people have been expecting since you know, 2010. And then, you know, not many when the pandemic hit thought, oh, this is what will produce that housing market. But it has. Now I would say from a financial stability standpoint, if housing prices are not of a level of concern right now, that’s just reflective of a lot of demand. And, you know, builders are going to bring forth supply. There’s also a sense that some of this may be pent up demand from when the economy was closed, which would imply that once that demand is met, that the real level of demand will be more manageable. So it’s a healthy economy now. We met recently with a bunch of home builders and many of them in the business 30-40 years said they’ve never seen the likes of it. But no, housing prices themselves are not a financial stability concern at the moment. We will watch that carefully. But in the near term, I wouldn’t think that that’s an issue that we’d be concerned about. 

EDWARD LAWRENCE. Thank you for the question. Thank you for the question, Mr. Chairman. So with the actions that you currently taken, how do you further fight a slowdown that you’re seeing? We talked about the retail sales numbers are a little bit sluggish this month, the unemployment, the job growth has slowed down. Is there more the Fed can do to fight this? Or is it now squarely in the Congress’s realm? 

CHAIR POWELL. There is more that we can do, certainly. We can expand our asset purchase programs, we can focus them more on the longer end. There are a number of options we would have to provide more support to the economy. So I would say though, that in the near term, the help that people need isn’t just from low interest rates that stimulates demand over time and works with long and variable lags. It’s really support. We’ve talked about this as all of these government policies trying to work together to create a bridge across this chasm, economic chasm that was created by the pandemic. And for many Americans, that bridge is there and they’re across it. But there’s a group for which they don’t have a bridge yet. And that’s who we’re talking about here. It’s the 10 million people who lost their jobs. It’s people who may lose their homes.  It’s — you see many, many millions of Americans are waiting in food lines in their cars these days all over the country. So we know there’s need out there. We know there are small businesses all over the country, that have been basically unable to really function and they’re just hanging on. And they’re so critical to our economy. So and by the way, now that we can kind of see the light at the end of the tunnel, it would be bad to see, you know, people losing their business, their life’s work in many cases, or even generations worth of work because they couldn’t last another few months, which is what it amounts to. So we have more we can do. And I think more the issue is we’re going to need to continue to provide support to this economy for quite a period of time, because the economy will be growing in expectation. We should be growing at a fairly healthy clip by the second half of next year. But it’s going to be a while before we really are back to the levels of labor market — the sort of conditions in the labor market that we had in early this year and for much of the last couple of years. So that’s how I think about it. 

HOWARD SCHNEIDER. Thank you. Howard Schneider. Hi, Chair Powell. Thanks for doing this. And thanks, Michelle. Two quick questions. One, on the vaccine, do you have, or has the Fed modeled sort of a working estimate of when the U.S. might reach something approaching herd immunity? And secondly, if you could please connect with me the lack of movement on the decision to maintain the current pace and quantities of bond purchases, with the fact that the steps are showing three years with inflation not reaching 2 percent. Some might argue that you need to do more to start fixing those expectations, and to let this drift and say we’re going to miss our target for another three years, doesn’t show a very firm commitment to the new framework. 

CHAIR POWELL. So in terms of the vaccine, yeah, we do estimates of when the United States would reach herd immunity, and they’re going to be similar to what other people think. It depends on your assumptions, such as how many people will actually take the vaccine. And how fast will the rollout be? So it’s assumption based on assumption based on assumption. But you know, sometime — it’s possible sometime in the middle or second half of next year. I’m not going to try to be precise because it’s just another estimate. You know, our people are very good, but they’re looking at the same data as other people are. And so, you know, all the estimates are — it depends on what your assumptions are. But under a normal set of assumptions, it could happen as soon as the middle of next year. In terms of the inflation, a couple things. Your second question. You know, I think you have to be honest with yourself about inflation these days. There are significant disinflationary pressures around the world, and there had been for a while. And they persist today. It is not going to be easy to have inflation move up. And it isn’t going to be just a question — it’s going to take some time. It took a long time to get inflation back to 2 percent in the last crisis. And, you know, we’re honest with ourselves and with you in the SEP that even with the very high level of accommodation that we’re providing both through low rates and very high levels of asset purchases, it will take some time. Because that’s what we believe the underlying inflation dynamics are in our economy. And that’s sort of why we’re — one reason why we’re concerned about inflation is that we see that. And that’s why we have adopted the flexible average inflation targeting framework. That’s why we’re aiming for an overshoot. But we’re honest with ourselves and with the public that it will take some time to get there. In terms of, you know, what would it really speed it up a lot to move asset purchases? You know, I don’t think that would really be — I think it’s going to take a long time however you do it. And, you know, we’ve been having very long expansions in the last several decades because inflation has not — really the old model was inflation would come along and the Fed would tighten and we’d have a recession. Now inflation has been low, and we haven’t had that dynamic. And the result has been three of the four longest expansions in modern history, in recorded history. So, you know, we’re thinking that this could be another long expansion. And that we’ll keep our — what we’re saying is we’re going to keep policy highly accommodative until the expansion is well down the tracks. And we’re not going to preemptively raise rates until we see inflation actually reaching 2 percent and being on track to exceed 2 percent. That’s a very strong commitment. And we think that’s the right place to be. 


CHAIR POWELL. I’m just going to add, markets have actually found this fairly credible. If you look at inflation what compensation and at the survey measures of when the Fed will lift off — everything has moved. There have been significant movements since we announced the framework in the direction that is consistent with the framework being credible to market participants. So I don’t think it’s something that — I mean, I’m actually pleased by the reception it’s gotten in markets. And markets have moved in ways that suggest it is credible. 


JAMES POLITI. Thank you, Michelle. And thank you, Chair Powell. You and the Fed have consistently said that the Fed is ready to provide the economy with more monetary support if needed. And really stressed to policymakers generally that the dangers of not doing enough outweigh the risks of doing too much in a situation where there’s so much suffering in the economy. The guidance today sort of cements asset purchases for a longer period of time, but it’s not a big new easing step. Why was now with the short-term outlook deteriorating due to the new coronavirus surges, not the moment for a big new easing step? And is it because of the mediumterm outlook improving? Or is it because the Fed just doesn’t have the capacity to sort of build that bridge over the next four to five months for the people who are struggling?

CHAIR POWELL. Right, so I could go back, James, to what I said earlier, which is this is a very, very large asset purchase program. It’s providing a tremendous amount of support for the economy. If you look at the interest sensitive parts of the economy, they’re performing very well. The parts that are not performing well are not struggling from high interest rates. They’re struggling from exposure to COVID. In a sense, these are these are the businesses that are really hit hard by people’s reluctance to gather closely. So we do have the ability to, you know, to buy more bonds or to buy longer-term bonds. And we may use it. I’m not saying we won’t use it. It may well come to using that. But also, I would also note though, monetary policy works with long and variable lags, is the famous statement. So we think that the big effects from monetary policy are, you know, months and months into the future. So this looks like — you know, it looks like a time when what is really needed is fiscal policy. And that’s why it is a very positive thing that we’re getting that. So we remain open to doing, you know, to either increasing the size of our asset purchases, if that turns out to be appropriate, or to just moving the maturities, moving to buying longer maturities. Because that had that also increases accommodation by taking more duration risk out of the market. But we think our current stance is appropriate. And we think that our — you know, that our guidance on asset purchases today will also provide support to the economy over time. Again, what we’ve done is we’ve laid out a path whereby we’re going to keep monetary policy highly accommodative for a long time, really until — really, until we reach very close to our goals, which is not, you know — not really the way it’s been done in the past. So that’s providing significant support for the economy now. We don’t think the economy suffers from a lack of highly accommodative financial conditions. We think it’s suffering from the pandemic and people wanting to not engage in certain kinds of economic activity. And we expect that with the virus, that will improve — that condition will improve. Nonetheless, again, we are prepared to use our tools and we will use them at such time and in such amounts as we as we think would help. 


MICHAEL DERBY. What I wanted to ask was, you know, given the size of the government borrowing and, you know, different regulatory changes in the financial sector, do you think that the Treasury market long run can operate smoothly without some sort of active Fed presence? You know, buying Treasury debt? You know, I’m referring back to [inaudible] Quarles. He had some questions about it. So I wanted to know where you stood on that issue. 

CHAIR POWELL. Right. So you’re breaking up a little. I think I got the sense of it, though. Yeah, I don’t think it’s at all a foregone conclusion that there needs to be a permanent Fed presence. And we certainly don’t — you know, that’s not something we’re planning on or intending. Right now we’re buying assets because it’s a — you know, it’s a time when the economy needs highly accommodative monetary policy and we think our asset purchases are, you know, one of the main delivery mechanisms for that, the size of the balance sheet. You know, there’s lots of demand for U.S. Treasury paper from all over the world. And I think we need to be thoughtful about the structure of the Treasury market, and look at ways to make sure that the capacity is there for it to be handled by the private sector. And there’s quite a lot of work going on on that front. But I don’t presume at all that this is something that needs to be — where the Fed needs to be in there at all. I would think that this should be handled by the private sector and can be. Institutions need to be able to hold this paper and there may be a central clearing angle that would, you know, net a lot of risk. That’s yet to be proven. There are a lot of things that are being looked at right now. 


JEFF COX. Yes. Chair, thank you taking the question. You’ve been asked this question before in various forms. I’m going to try it a little bit differently now. The equity market and the bond market seem to be telling two different stories about where things are heading. [ Inaudible ] On the stock market — bond yields remain very low. Does that concern you at all? And are you getting any more concerned about asset valuations in light of the highly accommodative Fed policies? 

CHAIR POWELL. You were breaking up, but I think I got that. I think I got it. So, you know, financial stability — we look at a broad range of things. We actually have a framework so that we can, you know, evaluate changes in financial stability over time, and so that the public can evaluate whether we’re doing a good job at it. So what do we look at? Asset prices is one thing that we look at. And you know, we published a report a few weeks ago on that — maybe it was month or so ago, anyway. And I think you’ll find a mixed bag there. It depends — with equities, it depends on whether you’re looking at PE’s or whether you’re looking at the premium over the risk free return. If you look at PE’s, they’re historically high, but you know, in a world where the risk free rate is going to be low for a sustained period, the equity premium, which is really the reward you get for taking equity risk, would be what you’d look at. And that’s not at incredibly low levels, which would mean that they’re not overpriced in that sense. Admittedly, PE’s are high, but that’s, you know — that’s maybe not as relevant in a world where we think the 10-year Treasury is going to be lower than it’s been historically, from a return perspective. You know, we look at — we also look at borrowing– leverage of financial institutions. We spent 10 years and the banks spent 10 years building up their capital. So far, they’ve been a source of strength through this crisis, and their capital has held up well. We look at leverage in the nonfinancial sector — that’s households and non-financial corporates. Non-financial corporate leverage is high. We’ve been watching that. But you know, rates are really low. And so companies have been able to handle their debt loads even in weak periods, because rates are quite low. Your interest payments are low. Defaults and downgrades have declined since earlier in the year. Households came into this very strong, and there certainly has been a hit there for people who are unemployed. But, you know, with the CARES Act, Congress replaced a lot of lost income. You know, it’s very important that the economy gets strong again. I mean, the ultimate thing to support financial stability is a strong economy. The last thing is really funding markets. And we found that there was a lot of unstable funding for companies, particularly financial companies. And that’s down to a to a very low level these days. So the broad financial stability picture is kind of mixed, I would say. I would say, you know, asset prices are a little high in that metric and in my view. But overall, you have a mixed picture. You don’t have, you know, a lot of red flags on that. And again, it’s something that we monitor essentially ongoing, almost daily. You know, we’re monitoring these prices for that and have published our framework, and, you know, we’ll be held accountable for what we saw and what we missed. So we work very hard at it. 

MICHAEL MCKEE. Mr. Chairman, I have a couple of questions about the fiscal support for the economy. This year’s budget deficit is $3.1 trillion. And Republicans have argued they don’t want to spend more, because we can’t afford it. So I’m wondering if you can make the case for how much we can afford. At what point do deficits on the debt start to have an impact on the economy or on interest rates? And how would we know when we get there? 

CHAIR POWELL. So people who run for elected office and win, they’re the ones that the reward is they get to make those very difficult decisions. And you know, so we’re not charged with providing fiscal advice to Congress. But I would just say, as a general rule, it is important to be on a sustainable fiscal path. From my way of thinking and many others’, the time to focus on that is when the economy is strong and when unemployment is low, and taxes are, you know, are pouring in. And there’s room to get on a sustainable path, because the economy’s really doing well. You’re still now in the, you know, some part of an economic crisis. And the fact that Congress is debating a fairly large bill today suggests that, you know, suggests that something fairly substantial is going to get done, we hope. But what’s being discussed is, you know, is of some size. In terms of what is a sustainable level, I think, you know, the question is — we’ve always looked at debt to GDP, and we’re very high by that measure. By some other measures, we’re actually not that high. In particular, you can look at the real interest rate payments, the amount of what does it cost? And from that standpoint, if you sort of take real interest costs of the federal deficit and divide that by GDP, we’re actually, you know — we’re actually on a more sustainable fiscal path if you look at it through those eyes. Again, these are issues for Congress. But you know, I’ll just say in the near term, I think the case for fiscal is strong. And I’m certainly hoping — I think it will be very good for the economy if we did get something soon. 

MICHAEL MCKEE. An argument for continuing to spend is that low interest rates make it affordable. Do you worry you’re getting a situation where you would have congressional interference in monetary policymaking, or at least feel significant political pressure to keep rates low because the country can’t afford to pay a significant interest bill? 

CHAIR POWELL. Yeah, I mean, that’s — I think we’re a very, very long way from that. You know, the Congress has given the Fed independence on the condition that we stick to our knitting. We try very hard to do that. And I think that’s what people call fiscal dominance. And I think we’re just a very, very long way from that. I think, you know, if we do our jobs well and support the economy and achieve maximum employment and stable prices, keep the financial system stable, I don’t think that that is something that I would worry about, certainly not in the near term. 



The Special Note summarizes my overall thoughts about our economic situation

SPX at 3719.03 as this post is written 

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