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Fed Meeting Takeaways

January 27, 2021

The statement was a snooze fest, but the word “vaccine” was used for the first time.  The two most significant sentences (in our estimation):

  • The pace of the recovery in economic activity and employment has moderated in recent months
  • The Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” (emphasis mine)

Basically, the Fed will continue buying $120B GameStop stocks bonds monthly.

 

Powell’s Q&A

Unfortunately, my favorite Fed chair said monetary policy has not been driving asset values up in recent months, which have instead been driven by stimulus and vaccine expectations.  Apparently that $120B a month is evaporating…

He also said the link between interest rates and asset prices is not so strong as some may think, despite pointing out how strong the housing market has been!

You’re killin’ me Smalls!

He rallied (by finally agreeing with me) that the upcoming rise in inflation will be transient.  He pointed out that we’ve been struggling with global disinflationary pressures for decades (aging demographics, technology, globalization) and that the hyper inflation some of us grew up with is not a threat.

“I’m much more worried about falling short and the damage that will do…than the possibility of higher inflation.  Frankly, we welcome somewhat higher inflation.”

On avoiding a taper tantrum, he said any discussion of tapering is premature.  “Current policy is just right and providing significant support for hiring and economic expansion.”  He continued, “It’s just too early to talk about dates, we should be focused on progress.  Nobody will be surprised when the time comes and we will do that well in advance.”

Lastly, he also talked about defaults have been surprisingly low and that some banks are actually reversing loss reserves (this is a good sign for stress tests).

Oh yeah, they didn’t change Fed Funds either.

The 10 Year Treasury had been down a few bps already to 1.00% prior to the statement and is currently at 1.02%.

 

Bottom Line

Powell threaded the needle and the market takeaway will largely be, “meh.”  The Fed isn’t hiking for years and I think there’s an increasing chance they still haven’t begun tapering this time next year.

Core PCE (Fed’s preferred measure of inflation) comes out tomorrow, with consensus forecast of 1.2% (a long way from 2.0%).

Pensford