Dec 17, 2020 - Economy

Fed chairman Jerome Powell is (still) here to save financial markets

Jerome Powell Superman logo

Illustration: Eniola Odetunde/Axios

Fed chair Jerome Powell sought to reassure financial markets at the Fed's latest policy meeting that even though the economy is improving faster than expected, the housing sector has "fully recovered" and equity markets are hitting all-time highs, the Fed isn't even close to thinking about raising U.S. interest rates.

Why it matters: The bonanza in the stock and housing markets have been buoyed by expectations for the continuation of rock-bottom rates and an avalanche of Fed bond buying.

  • Powell and other central bankers have been warning that the economy faces grave risks from the coronavirus pandemic in the near and medium term.
  • And his words also assured traders, investors and speculators that the party in asset markets can continue.

Details: The lone major change to the Fed's policy statement this month was a promise to continue to buy at least $120 billion of bonds each month "until substantial further progress has been made toward the Committee’s maximum employment and price stability goals."

  • That's great news for stock traders because it means the central bank will continue to push investors out of less risky assets like government bonds and money will keep flowing into riskier investments like equities.

On the other hand: The Fed increased its economic expectations for the economy, raising its real GDP forecast to a contraction of 2.4% in 2020, compared to a decline of 3.7% predicted in September.

  • The Fed also raised its 2021 GDP forecast to 4.2% from 4%.
  • And the central bank now estimates the unemployment rate will fall to 6.7% this year, an improvement from its projection of 7.6% in September.

Driving the news: Stock prices initially edged lower after the release of the statement, but turned higher during Powell's press conference as he doubled and tripled down on the Fed's commitment to keep monetary policy "highly accommodative" for "quite some time."

Data: FactSet; Chart: Axios Visuals

What's next: "There will come a time when the economy does not require increasing amounts of policy accommodation, and when that time comes, and that will be uncertain, and in any case, is some ways off," Powell said during his press conference.

  • "So I can’t give you an exact set of numbers. We, of course, as we approach that point, will be evaluating that."

Powell even weighed in on the debate over whether stock prices had reached unreasonable levels, as many on Wall Street have warned in recent weeks.

The bottom line: Powell argued that while historic market metrics like companies' price-to-earnings ratios were high, "that's maybe not as relevant in a world where we think the 10-year Treasury is going to be lower than it's been historically from a return perspective."

  • "We’re thinking that this could be another long expansion," he said later in his press conference.
  • "What we’re saying is we’re going to keep policy highly accommodated until the expansion is well down the tracks."
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