Federal Reserve policymakers were at pains to reassure investors the central bank would stay the course, ahead of this Wednesday’s inauguration of Joseph Biden as President of the US, and support efforts by the new administration to aid economic recovery from the pandemic.
“Be careful not to exit too early,” Fed Chairman Jerome Powell said at a virtual event for Princeton University, as he pledged to maintain asset purchases.
“And by the way, try not to talk about exit if you’re sending that signal, because markets are listening.”
His remarks seemed aimed in part to calm investors after Atlanta Fed chief Raphael Bostic suggested last week that the Federal Open Market Committee might want to recalibrate its asset purchase program later this year.
But the two were not that far apart. Powell, too, was optimistic about the economic prospects. In the Princeton webcast he said:
“You're in a situation where we could be back to the old economic peak fairly soon, and passing it.”
Powell spoke in favor of the fiscal stimulus enacted by Congress, including the $2.2 trillion in March and the $900 billion in December.
Boston Fed President Eric Rosengren became the first Fed policymaker to comment on the new stimulus package proposed by Biden, calling the $1.9 trillion package “appropriate” to counter the substandard growth expected in the first half. Among other things, the package adds further cash payments and extends unemployment benefits.
He told CNBC interviewer, Steve Liesman:
“While it’s a very big package, I do think until we get to the point where people have been vaccinated, where businesses have been bridged, and where many of the unemployed workers have come back to work, we need an expansionary fiscal policy.”
Rosengren has evolved into something of a hawk, but he said he is not concerned right now about financial stability. “My financial stability concerns are really about what happens when the economy is much stronger than it is today,” he said.
Fed Governor Lael Brainard emphasized that unemployment is running very high in some sectors, highlighting the importance of Fed support for the economy.
“The damage from COVID-19 is concentrated among already challenged groups,” she said in a webcast speech for the Canadian Association for Business Economics. Fed staff economists estimate that unemployment in the bottom quartile of wages is above 20%, contrasting with below 5% in the top quartile.
The Fed’s dual mandate calls for it to aim for maximum employment as well as for stable prices.
Fed Vice Chairman Richard Clarida reiterated last week in a Hoover Institution webcast that the FOMC would not raise rates until it saw inflation at 2%. “We are trying to tie our hands,” he said of the Fed’s new framework for monetary policy. Adding:
“It actually doesn’t seem lacking credibility to markets that we are going to do that.”
Some FOMC members are not so sure inflation has been tamed, however, especially given those sectors hard-hit by the pandemic. Kansas City Fed chief Esther George said inflation has been weighed down by those sectors, and it may come roaring back.
“To the extent that a post vaccine bounce-back boosts demand and prices in these sectors, including airfares and hotel accommodation, inflation could move up quickly.”
Christ Waller, former chief economist at the St. Louis Fed, was sworn in as the sixth member of the board of governors after the December meeting of the FOMC and will take part in the meeting Jan. 26-27 as a voting member for the first time.
Analysts rank him in the middle of the hawk-dove spectrum on monetary policy and expect him to further anchor the FOMC in the center. In other words, the former economics chair at the University of Notre Dame is not likely to rock the boat.