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On Wednesday, Powell was asked about the tepid offtake of the Main Street Lending Program (MSLP), where only around $1.4B was taken by distressed borrowers out of $600B due to lack of clarity about grants (subsidy) by the fiscal authority (Congress, Treasury). Banks are hesitant to provide MSLP loans as they were reportedly told by the U.S. Treasury to target zero losses despite the U.S. Congress has appropriated a substantial amount for this as grants.
Powell acknowledged there is a relatively small sanction of MSLP loans as banks will only lend to solvent and eligible borrowers who can serve the loan (as per U.S. Treasury Act 13 (3) and also CARES Act). For insolvent business funding needs, Congress has to provide grants as they can’t repay/service the loan because their business is closed. Thus Powell basically said the economy now needs more grants than loans, even at near 0% interest rate as the principal amount has to be paid back by insolvent borrowers; liquidity is not a problem here.
Powell was asked whether the Fed will keep rates near zero until there is a full economic recovery, especially for most affected consumer-facing service industry and associated employment (like airlines, hotel & leisure sector). Powell basically clarified the path of economic recovery concerning that particular sector is highly uncertain. And as long as those 11M people, almost 50% of 22M pandemic affected workers are not able to return their lost jobs, the economic/employment recovery will be uneven, have a serious structural macro-economic issue.
Thus the Fed is committed to being on hold until it sees sustainable recovery in employment for those vulnerable groups Powell also clarified that there will be some ‘lift-off’ (rate hikes) once Fed’s unemployment target rate (4%) or maximum employment under changed evolving economic situation comes closer. And even after any preliminary rate hikes (say in 2023), the subsequent rate hikes will be gradual and the overall monetary policy remains to be accommodative so that the economic recovery will continue and those 11M people got back their lost jobs.
Powell was asked whether the Fed is now out of ammunitions as it would neither cut-rate below 0% (NIRP) nor in a mood to go for more QE for the concern of economic overheating and asset (Wall Street) bubbles. Thus the Fed has to be on the sideline till 2023, waiting for more fiscal stimulus.
Powell goes in a defensive mood, explaining that the Fed is not out of ammunition as it has the backstop of U.S. Treasury (13/3lending tools), ‘powerful’ forward guidance, and QE. Powell also pointed out that the current corona recession is not a financial crisis like the 2008-09 GFC when there were financial bubbles like sub-prime housing loans and related banking crisis. The corona recession is mainly a health issue and a related lockdown of the economy to slow the spread. But that does not mean that the 2008 types of GFC can’t come again.
So, Powell effectively said the Fed has to be watchful for the next financial crisis; i.e. has to taper the pandemic QQE gradually from 2022. Powell also claimed after the 2008 GFC, because of the Fed’s ‘awful’ lot of QE and low rates for 7-years, the U.S. economy has undergone the record 128-months of economic expansion.
Powell was asked about Fed’s overall view about the U.S. labor market condition and the apparent discrepancy in the Aug NFP payroll report, where the BLS reported around 13.5M people as unemployed, while the continuing jobless claims almost 30M (?).
Powell explained overall the labor market is recovering gradually but far away from the maximum employment. The apparent discrepancy may be an issue of reconciliation between continuous, PUC jobless claims and the BLS number. But if the factor of BLS COVID misclassification (counted as employed, while actually unemployed) and persons out of the labor force is taken into account, the unemployment levels might be at least 3% higher than being reported.
Powell was also asked whether Fed’s unemployment target would be 3.5% (pre-COVID levels) or even lower going forward. Powell said the Fed has no particular number as a target but it would be great if the economy gets back to something like 3.5% or below 4.00% levels of unemployment without causing overheating (too much inflation) because that type of tight labor market will ensure more labor market participation, more jobs and wage growth.
But Powell also clarified that considering the reality, rather than a particular unemployment number, the Fed will like to target maximum unemployment in the evolving economic scenario (maybe higher than Fed’s official projection of 4%), ensuring a strong labor market, ensuring adequate wage growth, job opportunities, and labor force participation. Powell also stressed on goldilocks economy, where unemployment will be lower without causing the ‘troubling’ inflation.
Powell was asked why he is repeatedly referring the Aug forward guidance as ‘very powerful’, while two FOMC members dissented. Kashkari argued for simpler forward guidance and Kaplan thought the current guidance was fine for now. Powell clarified he welcomes diverse views in the FOMC and he’s lucky to get that. But Powell also stressed that despite diverse views on some issues, all FOMC participants are broadly supportive of Fed’s statement on longer-run goals and monetary policy strategy. As the Fed’s latest average inflation strategy is a new concept among G10 central banks, some diverse views are natural for the sake of the Fed’s credibility among the public.
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