Photographer: Stefani Reynolds / Bloomberg
Photographer: Stefani Reynolds / Bloomberg
During the policy meeting of the central bank, staff members of the Federal Reserve gave a potentially more worrying assessment of the risks to financial stability than the meeting that President Jerome Powell presented in public.
Speaking to reporters on January 27 after the Fed’s last policy meeting, Powell vulnerabilities to financial stability are generally referred to as “moderate”. The staff of the central bank gave a less insignificant assessment during the meeting in January and told policymakers that vulnerabilities in balance were ‘noticeable’, according to the minutes of the meeting announced on Wednesday.
Powell agrees with the overall assessment of the staff, but spoke only more generally to reporters than the detailed approach the Fed economists followed in their submission 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 stance on monetary policy and its approach to financial regulation. If policymakers view the weaknesses of the financial system as increasing, they may tighten the rules of banks or even increase borrowing costs to try to repair any excess barrier.
Fed officials at the meeting last month showed no sign that they would soon withdraw their support for the pandemic-stricken economy and financial markets. According to the minutes of the meeting, they expected that it would take a while before the conditions were met to reduce their massive purchases.
The Fed is currently buying $ 120 billion in assets per month – $ 80 billion in treasury and $ 40 billion in mortgage-backed securities – and has promised to maintain the pace until it makes “significant further progress” with its maximum employment targets and 2% inflation.
Read more: Fed officials have for some time continued to buy a purchase price of bonds
The question of when to start declining purchases may come up later this year as the economy picks up steam with a wider distribution of vaccines to combat the Covid-19 and even more spending by the federal government, Fed viewers said said. This can be especially the case if stock and asset markets continue their seemingly relentless progress and already further facilitate loose financial conditions.
In their detailed submission to the FOMC last month, Fed staff “rated the valuation of assets as valuable” – their highest risk characterization. Supported by the easy money holding of the central bank, the S&P 500 stock market index rose by 75% from the lows it reached in March when the pandemic began. The spread of corporate bonds also declined, with the returns on the most risky debt drops below 4% for the first time ever this month.
In terms of the balance of households and businesses, Fed economists saw the vulnerabilities up front as notable, ‘reflecting the increase in leverage and the decline in revenue and revenue in 2020’. It has been seen that large banks are in good condition.
Powell has noted in the past the dangers that excessive asset prices and other financial vulnerabilities could pose to the economy. In 2007, it was the explosion of a housing market bubble that undermined the economy. In 2001, it was a collapse in technological stock prices that led to a recession.
The Fed chairman defended the central bank’s easy monetary policy at its January 27 press conference, saying it was justified because wage statements were about 9 million fewer workers than they were before the pandemic.
He also argued that the rise in share prices in recent months has been driven more by fiscal policy and the development and distribution of vaccines than by the Fed’s monetary stance.
“I would say that the vulnerability of financial stability is generally moderate,” he said.