The willingness of the Fed to act is not the risk. The risk is that the economy improves more quickly than anticipated and catches the Fed off-guard. Maybe though not completely off guard. Powell does acknowledge that the economy is showing signs of life:
Economic activity has picked up from its depressed second-quarter level, when much of the economy was shut down to stem the spread of the virus. Many economic indicators show marked improvement.
That said, Powell remains focused on downside risks:
Both employment and overall economic activity, however, remain well below their pre-pandemic levels, and the path ahead continues to be highly uncertain… A full recovery is likely to come only when people are confident that it is safe to reengage in a broad range of activities. The path forward will depend on keeping the virus under control, and on policy actions taken at all levels of government.
That last line refers to the fiscal support for the economy, or the lack of continued fiscal support. Another coronavirus package, which I once thought was political no-brainer, looks very unlikely now that the battle for the next Supreme Court justice is heating up.
Powell is making clear that many firms need grants, not loans, and that is the job of Congress to provide.
I guess not only the wealthy saved some of that stimulus money. The broader lesson is that fiscal policy works
Dallas Federal Reserve President Robert Kaplan explained his dissent. Via the Wall Street Journal:
Federal Reserve Bank of Dallas leader Robert Kaplan said Monday the U.S. central bank’s new guidance on the future of interest rates may complicate officials’ future decision making and stoke risk-taking in financial markets.
I don’t find this argument compelling. Tying its hands a little tighter to the new strategy is exactly what the Fed should be doing. Plus, they aren’t tied down by a commitment to QE, so they still retain room to work. In addition, the Fed could always use concerns about financial stability to change the policy stance; the new strategy elevated that option.
On a final note, equity markets have hit a bit of a rough patch. The declines are not sufficient to generate concern from the Fed especially as credit markets appear to be functioning normally. The Fed is arguably relieved for the market to pull back a notch as it will help alleviate any lingering financial stability concerns (looking at Kaplan)
The increase in COVID-19 cases in Europe and in the UK is a reason for the USD demand, but the key factor remains the ammunition-saving Fed (not dovish enough), and this has taken markets by surprise.
Wzielfx
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The Fed is committed to a near-zero rate policy until inflation reaches 2% and anticipates it will remain at or above 2% on a sustainable basis. That is so far off in the future that we shouldn’t get too deep in the weeds before it happens, but now that the Fed has brought up the issue of rate hikes, they are stuck with a new communications problem. Realistically, every time some Fed president puts some conditionality in the Fed’s commitment, someone like Clarida is going to have to come out and lock down expectations again. If they can’t keep expectations locked down with verbal guidance, they are going to have to resort to yield curve control or asset purchases. Yield curve control is the easy route, but the Fed has dismissed it as an option for now. The real risk for rates is not the Fed’s commitment, but the Fed’s pessimism. If the economy continues to surprise on the upside, Fed forecasts will follow.
Wzielfx
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[USD] In the absence of total market mayhem, the Fed looks set to remain on the sidelines for now, whereas the probability of additional ECB and BoE stimulus is increasing, I think. For me, a key reason to remain bullish USD at this point.