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Jay Powell Lets It Loose

Friday 12th June 2020

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President Trump raged against Jerome Powell a while back, but after Wednesday the Federal Reserve Chairman may be the President’s version of most improved player. The Fed chief told financial markets that the central bank will keep interest rates near zero through at least 2022 while revving up bond-buying to record levels.

“We’re not even thinking about thinking about raising rates,” Mr. Powell said in his press conference following the Federal Open Market Committee’s June meeting. A critic might say it’s never a good idea for a central banker not to be thinking, but his point is to tell Wall Street and Washington that no one in the world is going to out-dove his Federal Reserve.

All of that may be appropriate for now given that the economy is only starting to emerge from its government-ordered coma. But it was striking that Mr. Powell stressed the smooth functioning of markets, not asset prices, as the reason for the Fed’s actions and dovish promises. Markets were a mess in March when the Fed began its extraordinary asset purchases and securities guarantees. But markets are working reasonably well now, as even high-yield (junk) bonds have become investment destinations. Investors clearly believe the Fed stands in the way of businesses bankruptcies.

Also striking is the Fed’s seemingly anomalous predictions for growth and low rates. The Fed board and regional presidents foresee an unemployment rate down to 9.3% this year, which would be a fantastic recovery. They also see the economy growing by 5% in 2021 and 3.5% in 2022, with a jobless rate of 5.5% in 2022. Yet they also see rates never rising from near zero and no end to buying Treasurys and other securities into 2022.

The Fed’s target for securities purchases isn’t all that far off from the new debt that the Treasury is issuing to finance Congress’s anti-pandemic spending binge. That’s another reason Washington will be happy with Mr. Powell—zero rates and bond-buying to finance unheard of levels of federal debt.

We’ll see if all of this helps the real economy and average workers as much as Mr. Powell and his mates think. But investors in asset prices will be as happy as Mr. Trump.

Source: Wall Street Journal

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