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On Friday, after the NFP report, the USD got some boost, Dow and Gold slips as the lower unemployment rate of 8.4% in Aug may force the Fed to prepare the market for the eventual pandemic QQE tapering (exit) earlier than expected. The Fed, under new policy rejig, will now target the 4% unemployment rate more rather than the average inflation of 2%. Powell clearly said the Fed will gradually taper its unprecedented pandemic QQE if it becomes confident that the unemployment rate will fall towards 4% levels on a sustainable basis. The Fed mandate is maximum employment ensuring price stability around 2% inflation levels (core PCE).
But on late Friday, Dow got some boost, USD edged down from the session high, while Gold surged after Powell assured the ZIRP regime till at least 2021 as the U.S. economic recovery is still fragile. Powell said in an interview on an apparent slowing economic recovery that although it’s continuing, going forward it may be harder as the COVID-19 curve is far from flattening and there are resurgences in various parts of the U.S.
On U.S. income inequality and whether the Fed is contributing there through its ultra-accommodative monetary policies, Powell denied the allegation. Powell pointed out some structural issues with the U.S. from the early 1970s such as lack of interest among ordinary Americans for higher education and appropriate skill development. This leads to a lack of evolving technology and innovative skills among ordinary American workers and coupled with that globalization, outsourcing, etc made income inequality among Americans.
Powell was also asked whether the COVID-19 pandemic is causing more inequality in the U.S.-Powell admitted that’s the case. And because of the legacy inequality, low wage workers and minorities in the consumer-facing service industry are suffering more in the pandemic. Thus the Fed wants to get back to the economy/jobs as early as possible to ensure a tight (hot) labor market, with low unemployment, high labor force participation along rising wages (like in Jan’20, just before the COVID-19 pandemic began).
On partisan U.S. politics, lingering Capitol Hill stalemate over corona stimulus/relief package 4.0 and Fed’s role/view-Powell clarified the Fed is apolitical. But the Fed is certainly watching the corona stimulus 4.0 daily soap-opera (political drama) closely and certainly hopes despite differences between Democrats and Republicans, the Capitol Hill will be able to extend the PUA benefit program and stop the mass-evictions of lower earners.
Powell also appreciated the role of the CARES Act to bring back almost 50% of the lost employment but emphasized bipartisan policies for the extension of the CARES Act to prevent any structural damage to the economy. But Powell also acknowledged the Fed has no power or influence to stop mass-evictions if it’s not ensured in the next corona relief package 4.0. The Fed has no authority over U.S. Congress and the Fed is obliged to do what Congress has asked for ensuring the dual mandate and any emergency lending under 13A (Treasury supports part of that as grants).
On U.S. high legacy government debt and any resolution for that, Powell said an extraordinary situation like COVID-19 needs extraordinary resolution. Thus the economy has to reset/rebuild again by appropriate investments (fiscal stimulus).
Powell also pointed out unlike the 2008 GFC, which was basically a man-made disaster; the current economic crisis caused by COVID-19 is a natural disaster (viral pandemic). Powell also clarified that no country (China) or no personality (Trump) should be blamed for this natural disaster (coronavirus) and this COVID led financial crisis needs to be fought collectively to return to the era of a goldilocks economy in the coming days. Powell also believes that it will be sooner rather than extremely later the U.S. will return to its golden age era of goldilocks economy (pre-COVID).
On Fed’s ZIRP policy to keep U.S. borrowing costs (bond yields) lower to fund corona stimulus and the unabated surge in government debt, now almost $25T, at 125% of the U.S. nominal GDP, Powell clarify that this is a structural issue for the U.S. economy even much before COVID-19. The high debt/GDP ratio for the U.S. is unsustainable in the long term, but in the short term, this is not the right time to rectify that by trying to reduce the debt.
Powell also pointed out that the right time of fiscal prudence will be when the economy will return to its past glory, people can earn higher, pay higher taxes and the government can also lower its spending. In the meantime, the government needs to ensure that people do not go into bankruptcies and for that, it needs to spend accordingly.
Powell was also asked whether the Fed is near its limit of pandemic QQE. Powell virtually admitted there is no limit, but also pointed out only a fraction of the Fed liquidity (lending programs) has been used by the market/Main Street as the liquidity situation has improved substantially of its own after Fed offer/intervention. Thus the Fed has no plan to increase its QQE in the coming days unless there is not a repetition of the money market crisis as in March’20, just after the invisible enemy (COVID-19) strikes the U.S.
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