The Fed on Wednesday did as expected — they kept policy on hold and cautioned that the outlook is extremely uncertain.
There’s not much else monetary policy can do at this juncture. The FOMC wants to keep what remaining options it has in reserve (no pun intended), and those options are now fairly limited.
An extension of the maturity profile of monthly asset purchases is the “logical” next step should more accommodation be needed, but it’s not entirely clear how WAM extension can help when it comes to fixing what’s still broken.
Financial conditions are near the easiest in history on some measures. Long-end yields are near the lowest ever. The dollar has been steadily on the back foot since last March, when the Fed embarked on a historically aggressive campaign to push down real rates and generally rescue the world from financial and economic oblivion.
Part and parcel of those efforts was engineering an epic run higher in equities. The Fed won’t explicitly say that, but it is what it is. Multiple expansion has proceeded in lockstep with the fall in US real rates (figure above).
Risk assets are, on many accounts, in a bubble. The Fed is aware of the criticism and while that won’t stop them from taking more action, it may give Jerome Powell pause. At the least, he’s likely to face questions about areas where speculative excess is glaringly obvious, and the Fed may eventually have to answer for its role in an overheating housing market.
And yet, outside of asset prices, things aren’t going as well. The January statement described waning economic momentum. “The pace of the recovery in activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic,” the FOMC said.
Recall that the leisure and hospitality sector suffered a big hit in December, when nearly a half-million jobs disappeared.
“The path of the economy will depend significantly on the course of the virus, including progress on vaccinations,” the Fed went on to say.
There was no indication that policymakers are considering dialing back accommodation. The guidance on asset purchases retained the “until substantial further progress has been made” language. Rates guidance is, of course, outcome-based now and will remain so for the foreseeable future.
Other than the reference to moderating economic activity, the vaccine, and the concentration of pain in pandemic-hit sectors, there were no material changes to the statement.
“Linking the path of the recovery to ‘progress on vaccinations’ is a nod to the fact viable inoculations exist, while also a recognition that distribution logistics have been challenging,” BMO’s Ian Lyngen remarked, adding that “the removal of ‘over the medium term’ as it relates to the weight on economic activity indicates the downside is being realized at this moment.”
The drama — to the extent any unfolded — would be reserved for Powell’s press conference, where he was sure to be asked about froth in markets, as well as the outlook for Joe Biden’s fiscal stimulus package.
Full January FOMC statement
The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.
The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer?term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, 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. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller.