Photographer: Stefani Reynolds / Bloomberg
Photographer: Stefani Reynolds / Bloomberg
Federal Reserve staff members gave a potentially more worrying assessment of the risks to financial stability at the central bank’s policy meeting last month than the one publicly presented by President Jerome Powell.
Speaking to reporters on January 27, after the Fed’s last policy-making meeting, Powell so-called “moderate” financial stability vulnerabilities. The central bank team gave a less optimistic assessment in its presentation at the January meeting, telling policymakers that the vulnerabilities overall were “notable”, according to the minutes of the meeting released on Wednesday.
Powell agrees with the team’s overall assessment, but was just speaking 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 matter. .
The Fed’s assessment of financial stability risks is important because it can play a role in determining the central bank’s position on monetary policy and its approach to financial regulation. If policymakers consider the weaknesses of the financial system to be high, they can tighten the rules that govern banks or even increase borrowing costs to try to control any surplus that may arise.
Fed officials showed no sign at last month’s meeting that they wanted to pull back soon in their support for the economy and financial markets hit by the pandemic. They hoped it would take “some time” until conditions were met to reduce their massive bond purchases, according to the meeting minutes.
The Fed is currently buying $ 120 billion in assets per month – $ 80 billion in Treasury bonds and $ 40 billion in mortgage-backed securities – and has pledged to maintain that pace until it makes “substantial progress” toward its maximum employment targets and 2% inflation.
Read more: Fed officials saw that the pace of bond buying would continue for ‘some time’
The question of when to start reducing these purchases may surface later this year, as the economy gains momentum with a wider distribution of vaccines to combat Covid-19 and even more federal government spending, Fed observers said This could be particularly the case if the stock and asset markets continue their seemingly inexorable advance and the already loose financial conditions are eased further.
In its detailed presentation to the FOMC last month, the Fed team “rated asset valuation pressures as high” – its highest risk characterization. Supported by the central bank’s easy-money stance, the S&P 500 stock market index rose 75% from the lows it hit in March, when the pandemic began. Corporate bond spreads also narrowed, with higher risk debt yields falling below 4% for the first time earlier this month.
As for the balance sheets of families and companies, the Fed economists considered the vulnerabilities on that front to be remarkable, “reflecting the increase in leverage and the decrease in revenues and revenues in 2020”. The big banks were in good shape.
Powell in the past has signaled the dangers that excessively high asset prices and other financial vulnerabilities can pose to the economy. In 2007, it was the bursting of a bubble in the housing market that brought the economy down. In 2001, it was a collapse in technology stock prices that helped lead to the recession.
The Fed chairman defended the central bank’s easy monetary policy at his Jan. 27 press conference, saying it was justified because the payroll is about 9 million workers below what it was before the pandemic.
He also argued that the rise in stock prices in recent months was driven more by fiscal policy and the development and spread of vaccines than by the Fed’s monetary stance.
“I would say that the vulnerabilities of financial stability in general are moderate,” he said.