What the Fed Said in ‘Five Easy Pieces’

Last Wednesday Fed Chairman Powell spoke showing he has the power to move markets when it comes to monetary policy and how to help deal with the current C-19 coronavirus chaos’s instant recession.

The FOMC was not expected make any change regarding Zero interest rates and nothing really new on the Fed’s ongoing asset purchases in here. But he did communicate…

Keep this in mind, this strong market recovery has been followed by strong and getting stronger economic reports

Consider this 1st: interest rates will remain low thru at least 2022. Mr. Powell noted a “whatever it takes” approach to support the economy, but the data released by the FOMC clearly indicates projecting no plans at all to raise interest rates anytime soon.

Following up on the “whatever it takes,” theme is that stimulus and support will remain firmly in place.

Fed officials have committed to providing more support to the economy in the wake of the forced medical emergency shutdowns. And to prove it, the policy stance included a note that the Fed would maintain its recent purchases rate of Treasury and MBSs rather than continuing with gradual weekly selloffs.

That implies $20-B in Treasuries and $22.5-B in mortgage-backed securities weekly. That will lead to an increase of the Fed’s balance sheet over the coming months as the Fed aims to keep a smooth, liquid, functioning market. The Fed has purchased more than $2-T in Treasury and MBSs since mid-March.

The Fed’s view on the labor market is that there is much work to be done in the labor market despite the better than expected unemployment and NFPs report.

Further, he noted that the labor market may have already bottommed, but he also said he does not know for sure.

A Key issue here is that Mr. Powell noted that there are well into the millions of people who may simply never be able to return to their old jobs, highlighting how inequality will require an all-in approach from society and from the government.

Mr. Powell also believes the “Great Depression” is a bad analogy for the economy. Even though Q-2 is expected drop in GDP and be the worst on record, he says there are so many fundamental differences that make comparisons to the Depression wrong. As he response in Y 2020 was “fast and forceful” with a strong economy and a healthy financial system ahead of the instant recession.

Investors and economists should understand that Mr. Powell has not pressed for any long-term fundamental changes in the potential of the economy. This indicates that the damage may not be permanent even though the cause and effect seen so far is different than anyone living has dealt with.

He does see that there are still risks. And noted that the Fed does not have any target level for asset prices in mind.

There are many ways to interpret the formal statements and the commentary from Fed officials.

My interpretation is: Don’t Fight the Fed & Don’t fight the Tape!

Have a healthy weekend, Keep the Faith!