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    Investors Are Focused on Treasurys. Here’s What the Fed Could Do.

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    AdvertisementContinue reading the main storySupported byContinue reading the main storyInvestors Are Focused on Treasurys. Here’s What the Fed Could Do.Central bankers have said they aren’t worried about a pop in longer-term bond yields. If they do become concerned, they have some options.The Federal Reserve chair, Jerome H. Powell, may be asked about higher bond yields during a scheduled event on Thursday.Credit…Al Drago for The New York TimesMarch 4, 2021, 5:00 a.m. ETLonger-term interest rates have jumped in recent weeks, a move that has been broadly interpreted as a sign that investors are betting higher growth and slightly faster inflation may be right around the corner.Federal Reserve officials have mostly brushed off the increase to date, saying it is a signal of economic optimism. But many investors have wondered whether the central bank might feel a need to intervene. The adjustment has at times roiled stock markets, which tend to sink when interest rates increase, and it could weigh on consumer spending and growth if it is sustained and borrowing becomes more expensive.Jerome H. Powell, the Fed’s chair, is set to speak at noon on Thursday at a Wall Street Journal event, where he may be asked to address the recent bond activity.Many on or adjacent to Wall Street have begun to put forward a two-part question: They are curious whether the Fed will step in to keep rates low and, if so, how. Below, we run through a few of the most likely options, along with plain-English explainers of what they mean and how they work.First, a little background.The yield on a 10-year Treasury note, a reference point for the cost of many types of borrowing, has popped since the start of the year. After dropping as low as about 0.5 percent in 2020, the yield jumped to 1.6 percent during the day last Thursday. It hovered around 1.5 percent by Wednesday.That is still very low by historical standards: The 10-year yield was above 3 percent as recently as 2018, and in the 1980s it was double digits. But a rapid adjustment in longer-term rates around the world has drawn attention. Global officials like Christine Lagarde, head of the European Central Bank, have voiced concern about the increases.U.S. officials have generally painted the adjustment as a sign that investors are growing more optimistic about growth as millions of Americans begin receiving Covid-19 vaccines and the government supports the economy with spending. And while markets appear to be penciling in slightly higher inflation, Fed officials had been hoping to push price expectations — which had been slipping — a little bit higher.“If you look at why they’re moving up, it’s to do with expectations of a return to more normal levels, more mandate-consistent levels of inflation, higher growth, an opening economy,” Mr. Powell said of rates during a hearing on Feb. 23.But last week’s gyrations prompted U.S. officials to make clear they’re watching to make sure that market moves don’t counteract the Fed’s policies, which make borrowing inexpensive to encourage spending and help the economy recover more quickly.“I am paying close attention to market developments — some of those moves last week and the speed of those moves caught my eye,” Lael Brainard, a Fed governor, said at a Council on Foreign Relations webcast on Tuesday. “I would be concerned if I saw disorderly conditions or persistent tightening in financial conditions that could slow progress toward our goal.”The question is what the Fed could do if rates get too high.Lael Brainard, a Fed governor, said she was monitoring market developments. Credit…Brian Snyder/ReutersBuying longer-term bonds is one option.The Fed’s most obvious choice to push back on a surge in longer-term bond yields is to just buy more of the bonds in question: If the central banks snaps up five-year, 10-year or 30-year securities, the added demand will push up prices, forcing yields — which move in the opposite direction — lower.The Fed is already buying $120 billion in mortgage-backed securities and Treasury bonds each month, a program it started last year both to soothe markets and to make many types of credit cheaper. Right now, it’s purchasing many types of bonds, but it could shake up that approach to focus on longer-term debt.There’s precedent for such a maneuver. The Fed bought long-term bonds to push down interest rates and bolster the economy in 2011. A similar policy was used in the 1960s. Economists and business networks often call such policies either “maturity extension” — shifting future purchases toward longer-dated debt — or “Operation Twist,” which tends to refer to selling short-term notes while buying longer-term bonds.Promising to ‘cap’ certain yields is another.The Fed’s more drastic option is called “yield curve control.” While it sounds nerdy, the approach is simple. The central bank could just pledge to keep a certain rate — say the five-year Treasury yield — below a certain level and buy as many bonds as necessary to keep that cap in place.Other central banks around the world, including the Bank of Japan and the Reserve Bank of Australia, have used yield curve control. But the tool carries risks: For example, it could force the Fed to buy huge sums of bonds and vastly expand its balance sheet in a worst-case scenario. That could matter for perceptions, since politicians sometimes criticize the Fed’s growing holdings, and it might have implications for market functioning.Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, told reporters on Tuesday that she was not worried about the yield curve yet. But she suggested that if the Fed did need to do something, shifting to long-term purchases would probably be preferable.“Right now I don’t think of yield curve control as something we would implement, myself, right away,” she said.The Fed can take several steps to deal with rockiness in the bond markets.Credit…Jim Lo Scalzo/EPA, via ShutterstockAdvertisementContinue reading the main story More

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    Powell Focuses on Economic Need at Key Moment in Markets and Politics

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    AdvertisementContinue reading the main storySupported byContinue reading the main storyPowell Focuses on Economic Need at Key Moment in Markets and PoliticsThe Federal Reserve will continue to support the economy, its chair, Jerome H. Powell, pledged, even as concerns about inflation rise.Jerome H. Powell, chair of the Federal Reserve, during a hearing on Capitol Hill in December. He told lawmakers on Tuesday that America’s economy is a long way from recovered.Credit…Al Drago for The New York TimesFeb. 23, 2021Updated 6:57 p.m. ETThe economy is down nearly 10 million jobs since last February, prospects for a rapid recovery — while brighter — remain far from assured, and as Democrats try to move a $1.9 trillion relief package through Congress, Republicans argue that it’s too big and could lead to inflation that would hurt consumers and businesses.Speaking against that tense backdrop on Tuesday, the chair of the Federal Reserve, Jerome H. Powell, delivered a blunt message to lawmakers that the economic outlook remains wildly uncertain and that the central bank must continue its extraordinary efforts to support the economy.It’s a pledge Mr. Powell has made many times in the last 11 months, but it also resonated through financial markets, which had begun to quiver as investors worried that a rapidly improving economy would prompt the Fed to pull back on its efforts to bolster growth.In testimony before the Senate Banking Committee, Mr. Powell declined to weigh in on the Biden administration’s spending plans but pushed back on the idea raised by multiple Republican senators that the economy is on the cusp of running too hot and sparking inflation.“The economic recovery remains uneven and far from complete, and the path ahead is highly uncertain,” Mr. Powell said. “There is a long way to go.”To bolster growth, the Fed plans to encourage lending and spending by holding interest rates near zero, where they have been since March, and by continuing to buy large quantities of bonds to keep money pumping through the financial system. Investors have grown concerned that the Fed might slow those bond purchases sooner rather than later if inflation begins to rise.Those worried investors had driven down stocks for five consecutive days. On Tuesday, the S&P 500 fell nearly 2 percent before snapping back after Mr. Powell’s remarks.In the bond market, interest rates on longer-term government debt have been climbing, reaching their highest point in a year this week. Those rates are the basis for corporate borrowing and mortgages, and their rise contributed to the stock market’s jitters.“We’re in one of these market mania moments in which there’s an intense focus on inflation,” and “he was very sanguine, very calm,” said Julia Coronado, founder of MacroPolicy Perspectives and a former Fed economist. “He kept turning attention back to the labor market.”Mr. Powell reiterated that the Fed plans to keep buying bonds until it sees “substantial further progress” toward its twin goals of full employment and stable inflation. America can “expect us to move carefully, and patiently, and with a lot of advance warning” when it comes to slowing that support, Mr. Powell said.Joblessness has come down sharply after surging last year, but the official unemployment rate remains nearly double its February 2020 level. Job losses have been more acute for members of minority groups and those with less education. Though spending has bounced back, activity in the service industry is still subdued.Vaccines are feeding hopes for a stronger and more complete 2021 rebound. Prices are expected to rise temporarily in the coming months, both compared with the weak readings from last year and, potentially, as consumers spend down savings amassed during the lockdown on restaurant dinners and vacations.But Fed officials have been clear that they do not expect inflation to pick up in a lasting way and that they plan to look past temporary increases when thinking about their policies. Price pressures have been stubbornly tepid, rather than too high, for decades and across many advanced economies.Mr. Powell said that longer-running inflation trends do not “change on a dime” and that if prices start to rise in an alarming way, the Fed has the tools to fight that.“I really do not expect that we’ll be in a situation where inflation rises to troubling levels,” Mr. Powell said. “This is not a problem for this time, as near as I can figure.”He also pushed back on the idea that government spending is poised to send prices rocketing out of control.“There perhaps once was a strong connection between budget deficits and inflation — there really hasn’t been lately,” Mr. Powell said. He noted that while he does expect inflation to jump around in coming months, there is a distinction between a temporary pop in prices and a sustained increase.Still, he declined to weigh in on how much more government support is appropriate.“I, today, will really stay away from fiscal policy,” he said near the very start of the hearing. He went on to tiptoe around or simply decline to answer questions about the minimum wage and the size and various components of the White House’s spending proposal. At one point, he was asked whether he would be “cool” with passing the spending bill or not.“I think by being either cool or uncool, I would have to be expressing an opinion,” Mr. Powell said.The Fed is politically independent and steers away from partisan issues, but it has been providing advice to policymakers in Congress and weighing in on socioeconomic disparities and financial risks tied to climate change over the last year. Some of that outspokenness has drawn Republican attention.Senator Patrick J. Toomey, Republican of Pennsylvania, warned on Tuesday that the central bank should avoid moving beyond its core duties.“As noble as the goals might be, issues such as climate change and racial inequality are simply not the purview of our central bank,” Mr. Toomey said.Mr. Powell did talk about how strong labor markets help people on the margins — those who aren’t trained or those with criminal records — to succeed. He made it clear that the central bank is hoping to return to a strong labor market, like the one that preceded the pandemic.The Fed’s bond purchases can help to bolster the economy by lowering longer-term interest rates and by prodding investors out of safer assets, like government bonds, and into stocks and other more active uses of their cash.Mr. Powell said the economy over the last three months hasn’t “really been making” the substantial progress the Fed is looking for as a precondition for slowing its purchases, as job gains have slowed. But he said there’s an expectation that progress should “pick up as the pandemic subsides.”When it comes to the Fed’s main interest rate, the federal funds rate, which helps to guide borrowing costs across the economy, Mr. Powell also struck a cautious tone. The Fed wants to achieve full employment, hit 2 percent on inflation and believe that the economy is on track for even faster price gains before raising that rate.“Right now, our focus is on providing the economy the support it needs,” Mr. Powell said at one point, summing up his message.Matt Phillips More

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    What the Bond Market Is Telling Us About the Biden Economy

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    AdvertisementContinue reading the main storyUpshotSupported byContinue reading the main storyWhat the Bond Market Is Telling Us About the Biden EconomyA recent rise in interest rates hints that a recovery is on the way, but it could also mean harder choices ahead on spending.Feb. 23, 2021, 5:00 a.m. ETTreasury Secretary Janet Yellen, right, at a White House meeting this month. She has emphasized that interest rates are crucial in determining how much the government should borrow and spend.Credit…Carlos Barria/ReutersWhile Washington debates the size of a new economic rescue plan, the bond market is sending a message: A meaningful acceleration in both growth and inflation in the years ahead looks more likely now than it did just a few weeks ago.That would be mostly good news, suggesting an economy recovering quickly from the pandemic. Interest rates remain very low by historical standards, even for the longest-term securities. Bond prices imply that inflation will be consistent with the Federal Reserve’s target of 2 percent annual rises in consumer prices, not a more worrisome spiral.[embedded content]But the surge in rates has brought an end to a period of several months when borrowing was essentially free, seemingly far into the future. For the Biden administration and the Federal Reserve, that implies that the free-lunch stage of the crisis is ending, and there could be harder questions ahead.In particular, it means that the downside of bad policy — federal spending that doesn’t generate much economic activity, for example — is higher than it was as recently as December.“We’re at a place where the markets are starting to grapple with the question of whether there are trade-offs between more stimulus today and potentially higher rates and more inflation down the road,” said Nathan Sheets, chief economist of PGIM Fixed Income and a former official at the Treasury and the Fed.The yield on 10-year Treasury bonds — the rate the United States government must pay to borrow money for a decade — was 1.37 percent Monday, low by historical standards but well above its recent low of 0.51 percent in August and 0.92 percent at the end of December. Those higher Treasury rates generally translate into higher mortgage rates and corporate borrowing costs, so the surge could take some of the air out of bubbly housing and financial markets.The inflation-adjusted interest rate the United States Treasury must pay to borrow money for 30 years was negative for much of the last year, meaning the government would pay investors back less in inflation-adjusted terms than it borrowed. Last week, the rate rose into positive territory for the first time since June and closed at 0.06 percent Monday. (For shorter time horizons, the “real yield” remains in negative territory.)That’s particularly striking given that Fed officials have repeatedly said they expect the short-term interest rate target they control to be near zero for quite some time — and bond investors appear to believe them. The yield on two-year Treasuries has barely budged in the same span.What is happening is known as a “steepening of the yield curve,” with long-term rates rising as short-term rates hold still. It tends to presage faster economic growth; it is the opposite of a “yield curve inversion,” which is known as a harbinger of recessions.But the flip side is that the moment appears to have passed when bond markets were giving the government an all-clear signal to do whatever was necessary to boost the economy, essentially making endless funding available at extraordinarily low cost. That could have implications for how the Biden administration approaches the rest of its economic agenda.Treasury Secretary Janet Yellen has emphasized that low interest rates, which keep the cost of debt service low, are important in her thinking about how much the government can comfortably borrow and spend.At The New York Times’s DealBook conference on Monday, Ms. Yellen, after noting that the government’s ratio of debt to the size of the economy is much larger than it was before the global financial crisis, said: “Look at a different metric, which is more important, which is what is the cost of that debt. Look for example at interest payments on the debt as a share of G.D.P.,” which is below 2007 levels.“So I think we have more fiscal space than we used to because of the interest rate environment,” Ms. Yellen told the Times’s Andrew Ross Sorkin.By implication, the further that bond yields rise, and inflation expectations along with them, the more the Biden administration would view their potential spending to be constrained. Congress is now at work on a $1.9 trillion pandemic aid package, which Democratic leaders hope to pass in March. They envision a large-scale infrastructure plan after that.Jerome Powell, the Federal Reserve chair, will face questions from Congress on Tuesday about the central bank’s policies. In other recent appearances, he has emphasized the importance of returning the economy to full health above all other goals, and stressed that inflation has been persistently too low rather than too high over the last decade.“Fed Chair Powell has taken each and every opportunity to reassure investors that the Fed would consider near-term inflationary pressure to be transitory,” said Katie Nixon, chief investment officer at Northern Trust Wealth Management. “The market is taking the Fed at its word that short rates will be anchored at zero for a considerable time.”The gap between the prices of regular and inflation-protected bonds as of Friday’s close imply that the Consumer Price Index is expected to rise 2.29 percent a year over the next five years, and 1.99 percent a year for the five years after that. The Fed aims for 2 percent annual inflation as measured by a different index that tends to be somewhat lower, meaning these so-called “inflation break-evens” are broadly consistent with the central bank’s goals.Put it all together, and the surge in rates so far is basically an optimistic sign that the post-pandemic economy will mark the end of a long period of sluggish growth. But the speed of the adjustment is a reminder that the line between too hot and just right is a narrow one.AdvertisementContinue reading the main story More

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    Biden and the Fed Leave 1970s Inflation Fears Behind

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    #masthead-section-label, #masthead-bar-one { display: none }The Coronavirus OutbreakliveLatest UpdatesMaps and CasesSee Your Local RiskNew Variants TrackerVaccine RolloutAdvertisementContinue reading the main storySupported byContinue reading the main storyBiden and the Fed Leave 1970s Inflation Fears BehindAdministration and Fed officials argue that workers not getting enough stimulus help is a larger concern than potential spikes in consumer prices.Federal Reserve Chair Jerome H. Powell has brushed off concerns about inflation, saying the bigger risk to the economy is doing too little rather than doing too much.Credit…Pool photo by Susan WalshJim Tankersley and Feb. 15, 2021Updated 5:54 p.m. ETWASHINGTON — Presidents who find themselves digging out of recessions have long heeded the warnings of inflation-obsessed economists, who fear that acting aggressively to stimulate a struggling economy will bring a return of the monstrous price increases that plagued the nation in the 1970s.Now, as President Biden presses ahead with plans for a $1.9 trillion stimulus package, he and his top economic advisers are brushing those warnings aside, as is the Federal Reserve under Chair Jerome H. Powell.After years of dire inflation predictions that failed to pan out, the people who run fiscal and monetary policy in Washington have decided the risk of “overheating” the economy is much lower than the risk of failing to heat it up enough.Democrats in the House plan to spend this week finalizing Mr. Biden’s plan to pump nearly $2 trillion into the economy, including direct checks to Americans and more generous unemployment benefits, with the aim of holding a floor vote as early as next week. The Senate is expected to quickly take up the proposal as soon as it clears the House, in the hopes of sending a final bill to Mr. Biden’s desk early next month. Fed officials have signaled that they plan to keep holding rates near zero and buying government-backed debt at a brisk clip to stoke growth.The Fed and the administration are staying the course despite a growing outcry from some economists across the political spectrum, including Lawrence Summers, a former Treasury secretary and top adviser in the Clinton and Obama administrations, who say Mr. Biden’s plans could stir up a whirlwind of rising prices.No one better embodies the sudden break from decades of worry over inflation — in Washington and elite circles of economics — than Janet L. Yellen, the former Federal Reserve chair and current Treasury secretary. Ms. Yellen spent the bulk of her career fighting in a war against inflation that economists have been waging for more than a half century. But at a time when the American economy remains 10 million jobs short of its pre-pandemic levels, and millions of people face hunger and eviction, she appears to be ready to move on.President Biden and Janet Yellen, the Treasury secretary, are pursuing a $1.9 trillion stimulus package to help struggling households and businesses make it through the pandemic downturn.Credit…Pete Marovich for The New York Times“I have spent many years studying inflation and worrying about inflation,” Ms. Yellen told CNN earlier this month. “But we face a huge economic challenge here and tremendous suffering in the country. We have got to address that. That’s the biggest risk.”In the guarded language of a Fed chair, Mr. Powell used a speech last week to push back on the idea that the economy was at risk of overheating. He said that prices could show a brief pop in the coming months, as they rebound from very low readings last year, and he said the economy could see a “burst” of spending and temporarily higher inflation when it fully reopened. But he said he expected such increases to be short-lived — not the sustained spiral that many economists worry about.“That’s really not going to mean very much,” Mr. Powell said, noting that inflation has trended lower for decades. “Inflation dynamics will evolve, but it’s hard to make the case why they would evolve very suddenly, in this current situation.”A small but influential group of economists is questioning that view — in particular, calling for Mr. Biden to scale back his economic aid plans, which include sending direct payments to most American households, increasing the size and duration of benefits for the long-term unemployed and spending big to accelerate Covid vaccine deployment across the country.They argue that the size of the package outstrips the size of the hole the coronavirus has left in the economy. With so many dollars chasing a limited supply of goods and services, the argument goes, purchasing power could erode or the Fed might need to abruptly lift interest rates, which could send the economy back into a downturn.“It’s hard to look at all those factors and not conclude there’s going to be inflationary pressure,” said Michael R. Strain, an economist at the conservative American Enterprise Institute who supported relief efforts earlier in the recession but was among the first economists to warn Mr. Biden’s plans could set off price spikes. “My worry is that by pushing the economy so hard, that will lead to some overheating.”The Coronavirus Outbreak More

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    Do Fed Policies Fuel Bubbles? Some See GameStop as a Red Flag

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    #masthead-section-label, #masthead-bar-one { display: none }GameStop vs. Wall StreetGameStop Stock FallsYoung, Fearless and Shaking Up Wall StreetHow to Win the Stock MarketGameStop and Your TaxesAdvertisementContinue reading the main storySupported byContinue reading the main storyDo Fed Policies Fuel Bubbles? Some See GameStop as a Red FlagAnalysts warn that low-interest rates are promoting speculative bubbles. The Fed itself has downplayed the possibility that it’s behind asset prices.GameStop’s share price last month when a rush of retail traders coordinated to push up the company’s stock value.Credit…Tony Cenicola/The New York TimesJeanna Smialek and Feb. 9, 2021Updated 5:33 p.m. ETBefore it fueled the run-up in GameStop’s stock, WallStreetBets, the Reddit message board, had another claim to fame: It helped popularize a series of memes centered on the Federal Reserve chair, Jerome H. Powell, and his central bank’s policy of keeping interest rates near rock bottom while buying government bonds to bolster the economy.“Money printer go brrrrr,” many of them read, suggesting that the Fed chair was essentially printing money and propping up markets by pumping cash into them through its program to buy government-backed bonds.Reddit and Twitter made images playing on Mr. Powell’s persona — he’s referred to almost exclusively as “JPOW” on WallStreetBets — so ubiquitous that they’ve become paraphernalia. Amazon now sells sweatshirts (Prime eligible!) printed with an image of the Fed chair as a Christ figure ringed in a halo of golden light. In place of the Bible, the gospel he holds declares, “Recession canceled, stocks only go up.”The blind optimism embodied in that statement — one might call it irrational exuberance — runs the risk of inflating bubbles in markets. Some experts see the saga of GameStop as a cautionary example of problems that can develop when investors get swept up in market momentum, driven to some extent by the Fed’s attempts to keep the economy humming along with low rates and bond purchases.“We’re observing a market mania, and the cost of money has something to do with this,” said Peter Fisher, who teaches finance at Dartmouth’s Tuck School of Business and once served in the Treasury Department and Federal Reserve. “It’s just not credible to suggest that the momentum in equity markets has nothing to do with the Fed’s efforts to keep interest rates so low for so long.”To be clear, GameStop has been an unusual situation.Hedge funds had been betting against the retailer’s stock, or “shorting” it, assuming its share price would fall. A rush of retail traders coordinated to make that bet go bad by pushing up GameStop’s price. Because of the way short selling works, the hedge funds were forced to buy GameStop themselves to limit their losses. The stock price skyrocketed, jumping more than 600 percent in days.A mass of newly minted retail investors has poured into the stock market over the last year, thanks to a confluence of factors including fewer social opportunities and work-from-home arrangements, temporary disruption of sports betting and the rise of trading that is billed as “commission free.” Retail trading of individual stocks now represents roughly 25 percent of overall stock market volume compared with just 10 percent in 2019, according to Goldman Sachs.But a shared belief that this is a good time to buy stocks is also fueling that trend.Leaving aside the surge — and then the crash — in so-called meme stocks, the market appears to be flirting with euphoria. Price-to-earnings ratios and other market barometers are at heights not seen in two decades, since the tail end of the dot-com boom.Much as they did in the tech stock frenzy of the 1990s, individuals are pushing levels of trading activity sharply higher, traders are borrowing on margin to buy stock, and investors are snapping up public offerings from unprofitable or unproven companies.Analysts across Wall Street say the traditional drivers of stock price movements — changing expectations for corporate profits and revenues — have in many cases become less relevant.In fact, the surge has come when the American economy remains damaged by the coronavirus pandemic. Fresh data released on Friday showed the economy in January was still nearly 10 million jobs short of employment levels that prevailed before the virus struck.Some of the bump has come because investors are placing their bets based on expectations about corporate prospects once demand has snapped back and the job market has healed. But analysts said a combination of fiscal stimulus — including checks that put money into consumers’ pockets — and the Fed’s cheap money policies have also helped bolster stock prices.The timing checks out. When the Covid-19 crisis first gripped the United States last February and March, the market plunged. The S&P 500 — which had been at record highs — collapsed by nearly 34 percent in a matter of weeks. Conditions became so volatile that even typically stable markets, such as that for Treasury bonds, began to malfunction under the strain.To keep the panic from freezing the financial system and worsening the economic damage, the Fed cut interest rates nearly to zero on March 15 and announced a series of major actions on March 23. The central bank said that it was willing to buy unlimited quantities of government-backed debt, and that it would tiptoe into the corporate bond market for the first time ever to prevent the pandemic’s market fallout from turning into a full-blown financial crisis.Jerome H. Powell, the Federal Reserve chair, said in late January that monetary policy should not be the first line of defense in containing financial risks.Credit…Al Drago for The New York TimesMarkets rejoiced. Stocks bottomed out and then ricocheted higher, climbing a 9.4 percent the next day and ultimately staging the best three-day performance for the index since 1933.“When essentially your central bank has drawn a line in the sand, as they did last March, then people understand that it’s a one-way bet,” said Paul McCulley, former chief economist of Pimco, a giant asset management shop.The S&P 500 stock index has jumped more than 70 percent since then. To put the breakneck speed of that run-up into context, the S&P 500 has climbed about as much over the past 10 months than it had in the four years leading up to the pandemic.When it comes to the Fed’s influence on stock prices, some of it is purely mechanical. When companies can borrow for less, it allows for bigger profits and cheaper business expansion opportunities, which could elevate their worth in the eyes of stockholders. Some of the increase probably reflects the reality that super-low rates push investors out of bonds and into riskier assets like stocks as they seek better returns.But analysts warn that part of the run-up simply owes to sentiment: Investors believe stocks will go up, in some cases because they believe in the Fed, and so they keep buying.The downside is that people can lose faith in an ever-rising stock market. And when the music stops, an optimism-fueled bubble can become a pessimism-pricked burst.GameStop in particular “does illustrate some of the financial vulnerabilities that can stem from ultra-loose monetary and fiscal policies,” Neil Shearing at Capital Economics wrote in a research note last week, noting that super-low interest rates, government stimulus payments, lockdowns and platforms that democratize trading have all come against a backdrop of “longstanding societal strains and the perception of a widening schism between Wall Street and Main Street.”Still, Mr. Shearing said in an interview, the stock market as a whole does not yet look dramatically overextended, and the Fed needs to focus on righting a pandemic-damaged economy — which is the goal of its low-rate and bond buying policies.The Fed argues that it is not driving asset prices to the degree that many believe. While Mr. Powell, the Fed chair, declined to discuss GameStop specifically at a news conference in late January, he painted financial risks over all as “moderate.” “If you look at where it’s really been driving asset prices, really in the last couple of months, it isn’t monetary policy: It’s been expectations about vaccines, and it’s also fiscal policy,” Mr. Powell said. “I think that the connection between low interest rates and asset values is probably something that’s not as tight as people think because a lot of different factors are driving asset prices at any given time.”But if, as many believe, the Fed’s low rates are a substantial part of the story, it’s unclear that raising them slightly would stop a run-up in stock prices. While slowing bond purchases probably could take the shine off investors’ enthusiasm, that could come at a cost to the real economy.Regardless, Fed officials are unlikely to try to cool things off in the market any time soon.“If one group of speculators wants to have a battle of wills with another group of speculators over an individual stock, God bless them,” Neel Kashkari, the Minneapolis Fed president, said at a virtual town hall event last week. He added that he was not “at all thinking about modifying my views on monetary policy because of speculators in these individual stocks.”AdvertisementContinue reading the main story More

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    How Full Employment Became Washington’s Creed

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    #masthead-section-label, #masthead-bar-one { display: none }The Jobs CrisisCurrent Unemployment RateThe First Six MonthsPermanent LayoffsWhen a $600 Lifeline EndedAdvertisementContinue reading the main storySupported byContinue reading the main storyHow Full Employment Became Washington’s CreedPolicymakers are eager to return to the period of low unemployment that preceded the pandemic and are less concerned than in previous eras about sparking inflation and taking on debt.People wait in line to receive donations at a food pantry in New York City earlier this month. Policymakers agree that a return to a hot job market should be a central goal.Credit…Mohamed Sadek for The New York TimesJan. 18, 2021, 3:29 p.m. ETAs President-elect Joseph R. Biden, Jr. prepares to take office this week, his administration and the Federal Reserve are pointed toward a singular economic goal: Get the job market back to where it was before the pandemic hit.The humming labor backdrop that existed 11 months ago — with 3.5 percent unemployment, stable or rising work force participation and steadily climbing wages — turned out to be a recipe for lifting all boats, creating economic opportunities for long-disenfranchised groups and lowering poverty rates. And price gains remained manageable and even a touch on the low side. That contrasts with efforts to push the labor market’s limits in the 1960s, which are widely blamed for laying the groundwork for runaway inflation.Then the pandemic cut the test run short, and efforts to contain the virus prompted joblessness to skyrocket to levels not seen since the Great Depression. The recovery has since been interrupted by additional waves of contagion, keeping millions of workers sidelined and causing job losses to recommence.Policymakers across government agree that a return to that hot job market should be a central goal, a notable shift from the last economic expansion and one that could help shape the economic rebound.Mr. Biden has made clear that his administration will focus on workers and has chosen top officials with a job market focus. He has tapped Janet L. Yellen, a labor economist and the former Fed chair, as his Treasury secretary and Marty Walsh, a former union leader, as his Labor secretary.In the past, lawmakers and Fed officials tended to preach allegiance to full employment — the lowest jobless rate an economy can sustain without stoking high inflation or other instabilities — while pulling back fiscal and monetary support before hitting that target as they worried that a more patient approach would cause price spikes and other problems.That timidity appears less likely to rear its head this time around.Mr. Biden is set to take office as Democrats control the House and Senate and at a time when many politicians have become less worried about the government taking on debt thanks to historically low borrowing costs. And the Fed, which has a track record of lifting interest rates as unemployment falls and as Congress spends more than it collects in taxes, has committed to greater patience this time around.“Economic research confirms that with conditions like the crisis today, especially with such low interest rates, taking immediate action — even with deficit finance — is going to help the economy, long-term and short-term,” Mr. Biden said at a news conference on Jan. 8, highlighting that quick action would “reduce scarring in the work force.”Jerome H. Powell, the Fed chair, said on Thursday that his institution is tightly focused on restoring rock-bottom unemployment rates.“That’s really the thing that we’re most focused on — is getting back to a strong labor market quickly enough that people’s lives can get back to where they want to be,” Mr. Powell said. “We were in a good place in February of 2020, and we think we can get back there, I would say, much sooner than we had feared.”The stage is set for a macroeconomic experiment, one that will test whether big government spending packages and growth-friendly central bank policies can work together to foster a fast rebound that includes a broad swath of Americans without incurring harmful side effects.“The thing about the Fed is that it really is the tide that lifts all boats,” said Nela Richardson, chief economist at the payroll processor ADP, explaining that the labor-focused central bank can set the groundwork for robust growth. “What fiscal policy can do is target specific communities in ways that the Fed can’t.”The government has spent readily to shore up the economy in the face of the pandemic, and analysts expect that more help is on the way. The Biden administration has suggested an ambitious $1.9 trillion spending package.President-elect Joseph R. Biden Jr. has appointed top officials with a job market focus.Credit…Amr Alfiky/The New York TimesWhile that probably won’t pass in its entirety, at least some more fiscal spending seems likely. Economists at Goldman Sachs expect Congress to actually pass another $1.1 trillion in relief during the first quarter of 2021, adding to the $2 trillion pandemic relief package passed in March and the $900 billion in additional aid passed in December.That would help to stoke a faster recovery this year. Goldman economists estimate that the spending could help to push the unemployment rate to 4.5 percent by the end of 2021. Joblessness stood at 6.7 percent in December, the Bureau of Labor Statistics said earlier this month.Such a government-aided rebound would come in stark contrast to what happened during the 2007 to 2009 recession. Back then, Congress’s biggest package to counter the fallout of the downturn was the $800 billion American Recovery and Reinvestment Act, passed in 2009. It was exhausted long before the unemployment rate finally dipped below 5 percent, in early 2016.At the time, concern over the deficit helped to stem more aggressive fiscal policy responses. And concerns about economic overheating pushed the Fed to begin lifting interest rates — albeit very slowly — in late 2015. As the unemployment rate dropped, central bankers worried that wage and price inflation might wait around the corner and were eager to return policy to a more “normal” setting.But economic thinking has undergone a sea change since then. Fiscal authorities have become more confident running up the public debt at a time of very low interest rates, when it isn’t so costly to do so.Fed officials are now much more modest about judging whether or not the economy is at “full employment.” In the wake of the 2008 crisis, they thought that joblessness was testing its healthy limits, but unemployment went on to drop sharply without fueling runaway price increases.In August 2020, Mr. Powell said that he and his colleagues will now focus on “shortfalls” from full employment, rather than “deviations.” Unless inflation is actually picking up or financial risks loom large, they will view falling unemployment as a welcome development and not a risk to be averted.That means interest rates are likely to remain near zero for years. Top Fed officials have also signaled that they expect to continue buying vast sums of government-backed bonds, about $120 billion per month, for at least months to come.Fed support could help government spending kick demand into high gear. Households are expected to amass big savings stockpiles as they receive stimulus checks early in 2021, then draw them down as vaccines become widespread and normal economic life resumes. Low rates might make big investments — like houses — more attractive.Still, some analysts warn that today’s policies could result in future problems, like runaway inflation, financial market risk-taking or a damaging debt overhang.In the mid-to-late 1960s, Fed officials were tightly focused on chasing full employment. As they tested how far they could push the job market, they did not try to head inflation off as it crept up and saw higher prices as a trade off for lower joblessness. When America took its final steps away from the gold standard and an oil price shock hit in the early 1970s, price gains took off — and it took massive monetary belt-tightening by the Fed and years of serious economic pain to tame them.Many politicians have become less worried about government borrowing thanks to historically low interest rates.Credit…Erin Schaff/The New York TimesThere are reasons to believe that this time is different. Inflation has been low for decades and remains contained across the world. The link between unemployment and wages, and wages and prices, has been more tenuous than in decades past. From Japan to Europe, the problem of the era is weak price gains that trap economies in cycles of stagnation by eroding room to cut interest rates during time of trouble, not excessively fast inflation.And economists increasingly say that, while there may be costs from long periods of growth-friendly fiscal and monetary policy, there are also costs from being too cautious. Tapping the brakes on a labor market expansion earlier than is needed can leave workers who would have gotten a boost from a strong job market on the sidelines.The period before the pandemic showed just what an excessively cautious policy setting risks missing. By 2020, Black and Hispanic unemployment had dropped to record lows. Participation for prime-age workers, which was expected to remain permanently depressed, had actually picked up somewhat. Wages were climbing fastest for the lowest earners.It’s not clear whether 3.5 percent unemployment will be the exact level America will achieve again. What is clear is that many policymakers want to test what the economy is capable of, rather than guessing at a magic figure in advance.“There’s a danger in computing a number and saying, that means we are there,” Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, said at an event earlier this month. “We’re going to learn about these things experientially, and that to me is the right risk management posture.”AdvertisementContinue reading the main story More

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    When Will Interest Rates Rise? Fed Chair Says ‘No Time Soon’

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    AdvertisementContinue reading the main storySupported byContinue reading the main storyWhen Will Interest Rates Rise? Fed Chair Says ‘No Time Soon’Jerome H. Powell, chair of the Federal Reserve, said the central bank remained far from dialing back support for the economy.Jerome H. Powell, the chair of the Federal Reserve, said the U.S. economy is a long way from recovery and the central bank would not raise interest rates anytime soon.CreditCredit…Pool photo by Greg NashJan. 14, 2021Updated 4:56 p.m. ETWith the incoming Biden administration pushing for more economic stimulus and with multiple coronavirus vaccines already approved, some investors have been wondering whether the Federal Reserve might soon start to ease off its support for the economy.Jerome H. Powell, the central bank’s chair, made it clear on Thursday that the central bank would be cautious in doing so — and that action was anything but imminent. During a webcast question-and-answer session, Mr. Powell said it would take time for the economy to recover from the pain of the pandemic era.“When the time comes to raise interest rates, we will certainly do that,” he said. “And that time, by the way, is no time soon.”Currently, dire short-term conditions — surging virus deaths, high unemployment, and partial state and local economic lockdowns — contrast sharply with the longer-term outlook. Economists think that the economy might come roaring back later in 2021 as vaccines allow normal life to resume and consumers spend money they saved during the pandemic.That split has led some investors to worry that the Fed might speed up its plans to reduce the pace of its enormous bond purchases, or even to lift interest rates from the near-zero setting that has been in place since March. The central bank has been buying about $120 billion in Treasury and mortgage-backed debt per month to keep markets operating smoothly and to help goose the economy.“We’ll let the world know” when it’s time to discuss plans for slowing purchases, Mr. Powell said, and that will happen only when it’s clear that they are well on their way toward their economic goals.“We’ll do so, by the way, well in advance of active consideration of beginning a gradual taper in asset purchases,” he added.Other top Fed officials, including Lael Brainard, who is a board governor, and Vice Chair Richard Clarida, had also struck a cautious tone when talking about the outlook for both economic growth and monetary policy in recent days. But their remarks had contrasted with more impatient ones from some of the Fed’s 12 regional bank presidents, a fact that had caught investor attention. Mr. Powell’s appearance put to rest any suggestion that the central bank is planning to hasten its return to a more normal policy setting.Mr. Powell and his colleagues must thread a needle. In 2013, markets gyrated wildly as the Fed made its initial moves away from huge bond purchases, in what became popularly known as the “taper tantrum.” Now, officials hope to offer investors plenty of information about what they are planning — to avoid spooking them — without signaling that a reduction in economic support is right around the corner.“They’re committed to ensuring that there is not another taper tantrum,” said Subadra Rajappa, head of U.S. rates strategy at Société Générale. The goal in reinforcing low rates and a steady course for asset purchases, she added, is “to talk down the market.”Fed officials and private forecasters are projecting a strong pickup in economic activity once vaccines become widely available. They have also acknowledged that inflation is likely to move higher in 2021, because of short-term technical factors, and that a short-lived spike in price increase would not necessarily worry Fed policymakers.Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said in a Bloomberg television interview earlier on Thursday that temporary jumps in inflation would not necessarily signal that tepid price gains — the problem of the modern economic era — were a thing of the past.“It’s quite possible that we’ll see some spikes above 2 percent. In fact, the math of inflation would suggest that we’ll get some spikes in the middle of the year,” she said. “That’s not a victory on price stability.”Mr. Powell also acknowledged that inflation could increase temporarily, but said the bounce would be “very unlikely” to lead to persistently faster gains. If inflation does pick up substantially, the Fed knows how to use policy to counteract that.“Too-low inflation is the much more difficult problem to solve,” he said.He reiterated that the Fed, which has made a habit of lifting interest rates to prevent overheating in the labor market, would no longer do that — instead allowing the job market to continue to tighten so long as excesses do not appear.“We saw the social benefits that a strong labor market can and did bring,” Mr. Powell said, referring to the last business cycle, in which unemployment dropped to 3.5 percent but wage and price increases remained tame. “One of the big lessons of the last crisis was how much room there was in labor force participation.”And he said he believed that the economy could return to its pre-crisis levels.“I’m optimistic about the economy over the next couple of years, I really am,” Mr. Powell said. “We’ve got to get through this very difficult period this winter, with the spread of Covid.”AdvertisementContinue reading the main story More