The Fed holds firm

Following the coverage from Fed Chairman Jerome Powell’s press conference on Wednesday, US time, is how hesitant he is about putting his foot on the breaks of the roaring recovery and rising asset prices.

“I just don’t see why anyone doubts the Fed’s commitment to their strategy. They are all in. Powell just doesn’t blink,” tweeted Ian Shepherdson, chief economist at Pantheon Macroeconomics.

(Photo by Stefani Reynolds-Pool/Getty Images)

“While the recovery has progressed more quickly than generally expected, it remains uneven and far from complete,” Powell said in remarks after the bank’s regular two-day meeting among senior officials.

Powell also addressed the statements from one of the Fed’s most outspoken critics — the former Treasury Secretary Larry Summers, who believes the Fed’s easy credit and bond buying stance is risky, especially in consideration of the unprecedented stimulus packages passed and planned by a Congress currently in a majority favouring the Democrats.

On the Fed's colossal asset purchasing programme:

Will the Fed start considering winding down the $120 billion per month in asset purchases any time soon?

“No. it is not time yet,” Powell replied.

He repeated it would be “some time” before the Fed has that conversation. Some economists think the earliest this might happen is at the Fed’s next meeting in June, but more are thinking Powell might use his annual speech at the Jackson Hole, Wyo., conference in late August to start that conversation.

Powell said he was somewhat uneasy about the runup in housing prices, saying it was not an “unalloyed good,” but gave no hint that the Fed is thinking about getting involved. He pegged the problem on lack of supply and high demand. “My hope would be that, over time, housing builders can react to this demand and come up with more supply,” Powell said. “We don’t have that kind of thing where we have a housing bubble where people are over levered,” he said.

Asked why the Fed needed to buy $40 million per month of mortgage-backed securities if the housing market was so strong, Powell said the purchases “are not meant to provide direct help to the housing market.” He repeated the Fed will taper when the time comes.

Risk of inflation

Powell said the economy is facing “unprecedented events,” but that the Fed thinks price pressures will be temporary. “If inflation were to move persistently and materially above 2%,” the Fed would use its tools to bring inflation down. “We’re all very familiar with the history of the 1960s. That is a very different situation,” he said. “We understand our job,” he said.

Powell addresses the elephant in the room and acknowledges the “froth” brewing in financial markets

Many in the financial industry think the repercussions of the Fed’s asset purchases will be rising unchecked asset prices. Powell seemed to raise his level of concern here. “You are seeing things in capital markets that are a bit frothy,” he said. And Fed policy does play a role, he confirmed.

“Overall financial stability picture is mixed, but on balance, it is manageable,” he said.