Photographer: Stefani Reynolds / Bloomberg
Photographer: Stefani Reynolds / Bloomberg
Federal Reserve staff made a potentially more worrying assessment of the 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 January 27 after the Fed’s last policy meeting, Powell called “moderate” financial stability vulnerabilities in general. Central bank staff made a less bloody assessment in their presentation at the January meeting, telling policymakers that balance sheet vulnerabilities are “notable,” according to minutes of the meeting released Wednesday.
Powell agrees with the staff’s overall assessment, but 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 well-known Fed official.
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 feel that the weaknesses of the financial system are high, they can tighten the rules that govern banks or even increase the cost of borrowing to try to limit any excesses they see.
Fed officials showed no sign at last month’s meeting that they would like to withdraw soon in support of the pandemic-affected economy and financial markets. They expected “some time” to pass before meeting the conditions for reducing their massive bond purchases, according to the minutes of the meeting.
The Fed currently buys $ 120 billion in assets per month – $ 80 billion in treasury and $ 40 billion in mortgage-backed securities – and is committed to maintaining 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 it will start reducing these acquisitions could come to the fore this year, as the economy gathers steam with a wider distribution of vaccines to fight Covid-19 and even more. many federal government spending, Fed observers said. This could be especially the case if the stock and asset markets continue their seemingly inexorable advance and already weak financial conditions continue to relax.
In their detailed presentation to the FOMC last month, Fed staff “rated the asset valuation pressures as high” – the highest risk characterization. Supported by the simple position of the central bank, the S&P 500 stock index rose by 75% compared to the lows it reached in March, when the pandemic started. Corporate bond spreads also fell in yields on the most risky debt falling below 4% for the first time earlier this month.
In terms of household and business balance sheets, Fed economists considered the vulnerabilities on this front to be notable, “reflecting an increase in leverage and a decline in revenues and revenues in 2020”. It has been seen that the big banks are in good shape.
In the past, Powell has signaled the dangers that excessively high asset prices and other financial vulnerabilities can bring to the economy. In 2007, a bubble burst in the real estate market brought the economy down. In 2001, there was a collapse in technology stock prices that contributed to a recession.
The Fed chairman defended the central bank’s light monetary policy at a Jan. 27 news conference, saying it was justified because wages are about 9 million workers apart from what they were before the pandemic.
He also argued that the rise in stock prices in recent months was driven more by fiscal policy and vaccine development and dissemination than by the Fed’s monetary stance.
“I would say that vulnerabilities to financial stability in general are moderate,” he said.