Why the Fed’s Focus on Those Most Affected by the Pandemic Matters to Markets

Hoovervilles, the slums built into New York City’s Central Park and other open spaces during the Great Depression, became an enduring image of a decade marked by rising unemployment and hunger. Federal Jerome Powell meets with officials next Wednesday to provide an update on the economy, there is little expectation of policy changes, but investors will no doubt be listening to his comments for clues as to what the job recovery or the Rising inflation after the pandemic could mean for financial markets.

Investors may also want to pay close attention to what Powell might say about the homeless camp two blocks from his Washington, DC office, a topic the central bank chief recently brought up three times in the span of seven days. , as the Washington Post noted. “He’s using his profile to get attention,” Sheila Bair, former director of the US Federal Deposit Insurance Corporation, said of Powell’s recent emphasis on the tent city of DC, as well as his frequent mention of the nation’s huge income inequality in the past year and the worsening poverty rate during the pandemic. “But what the Fed hasn’t really talked about,” Bair said, is how “monetary policy has made inequality worse,” especially since most assets, including rising stocks, benefit from its policies of the It was COVID, but they are mostly owned by the wealthy. Bair, a key architect of banking reforms in the aftermath of the 2008 financial crisis, wants to hear from Powell talk more about “monetary policy limits, which may be doing more harm than good,” particularly when it comes to households and retirees. looking to increase their savings. without taking too many risks. “No one questions his motives or his best intentions,” Bair said. “But does it really help more than it hurts?” End Ironclad Karen Petrou, a banking policy expert who recently finished writing a book called “Engine of Inequality,” on the pitfalls of Fed policy, wants the Fed to stop relying on data ”to inform its decisions, ignoring the fact that the United States no longer has a “large and vibrant middle class.” He also wants the Fed to immediately say that it is opposed to keeping interest rates low as economic activity recovers and to stop providing an “iron-clad” safety net for sectors like the US high-yield bond market. “You take a risk, you pay the price,” Petrou, co-founder of Federal Financial Analytics, Inc. told MarketWatch, while warning that the Fed’s endorsements, including its list of emergency loan services implemented the Last year, they create an “acute moral hazard” that could be “potentially terminal, and the markets expect the Fed to always bail them out.” US corporations have borrowed record amounts of debt from the bond market over the past few years at interest rates. ultra-low interest rates. Treasurys BX’s asset purchase program: TMUBMUSD10Y and MBB mortgage bonds, -0.10% from the central bank for about $ 120 billion a month has not only kept the flow of cr Edited on Wall Street, it has also helped accelerate asset values ​​as investors seek returns. In early April, yields on the lowest rated CCC-rated US high-yield bonds fell to a new low of around 7.1%, compared to an all-time high of nearly 40% in 2008. For a brief Last year, the Fed was buying corporate debt for the first time in history. That program ended in late December, in part because borrowing conditions for large corporations had rarely been better, even for companies deemed quite risky. But many market participants still see the idle program in the background, waiting to be reactivated, if necessary. About the roaring 1920s About a week ago, new Federal Reserve Board Governor Christopher Waller said the economy was “ready to explode” and predicted that America’s gross domestic product could expand at a rate of 6.5% during the year. Waller also suggested that it was too early for the central bank to withdraw its support, given the need to compensate for the more than 8 million jobs still lost to the pandemic. The promise of continued monetary support until the economy fully recovers along with the milestones reached in the US vaccination launch, Helped the top-line Dow Jones Industrial Average DJIA, + 0.67% to ignore concerns on a possible capital gains tax increase proposed by the president. Joe Biden this week and the S&P 500 SPX Index, + 1.09% ended Friday near an all-time high. Read: Capital Gains Tax Increase? Why the stock market rallied so quickly This is probably as good a time as any to reflect on what followed past periods of great wealth disparity in America. A decade of crisis followed the roaring 1920s, a “period of optimism and prosperity for some Americans,” according to the Herbert Hoover Presidential Library and Museum, which ended with the stock market crash of 1929 and was followed by the 1933 banking crisis. While history also points to the pitfalls of rampant speculation, the Fed has repeatedly promised to do whatever it takes to keep credit flowing during last year’s pandemic. The hope has been that it can keep businesses afloat until the COVID-19 threat recedes, while also preventing the levels of economic distress of the 1930s. the pedal because of the problems that concern him with all these people on the sidelines, “said Peter Duffy, director of credit investments at Penn Capital. on Powell’s recent comments on homeless camps. But if you look at the number of JOLTS, which tracks job openings, the evidence could suggest that some small businesses are having trouble finding workers and that workers may need to be persuaded to leave, because they have been getting good. stimulus checks. “But Duffy also hopes the mismatch between job openings and jobless jobs will ease this spring as the weather warms at least in the Northeast and a larger portion of the US population gets vaccinated for “A month or two matters, here, a lot,” he said, in a telephone interview. “What worries me,” Bair told MarketWatch, is that Powell’s focus on tent cities could end up translating into an even more aggressive Fed, interventions in the markets, which will not benefit low-income workers who are more vulnerable to losing a job or a home, but rather increase the financial risks in the system. “I guess they stay the course.” Bair said of Powell’s frequent assurances that benchmark interest rates will remain stable, close to zero, until 2023, even if the economy appears to be at a tipping point. from financial oversight to address some of the instabilities this is creating, ”he said. Despite what others may think, Bair also sees places where the Fed still has ammunition to use, even if it may look different. “First of all, I would make sure we have a stable financial system,” Bair said. “If we have another financial crisis, African American households will be hit the hardest, along with other low-income families.” “I think there are a lot of implicit biases in the risk weights and [bank] Leverage ratios, “he said, adding that they” disproportionately impact minority families. “” Causation is not a correlation, but at the end of the day, they make it much more profitable to lend to the rich. “In terms of Economic data in the coming week, the highlight will likely be the release of the first estimate of first quarter economic growth or GDP on Thursday, a day after the statement of the Fed’s policy meeting and press conference of Powell on Wednesday. But investors will also digest US basic and durable capital goods orders for March on Monday, followed Tuesday by the latest Case-Shiller Home Price Index, a consumer confidence index. and the homeownership rate for the first quarter and Friday will bring data on personal income and spending.