Declaring that the battle against the COVID-19 pandemic is not over, US Federal Reserve Chairman Jerome Powell pledged to keep the monetary spigots wide open to aid the pandemic-hit US economy, brushing aside concerns that the super-easy stance would spawn a stock market bubble and too-high inflation.
“We have not won this yet,” Powell told a news conference on Wednesday, after the US central bank voted to keep short-term interest rates pegged near zero. “We’re a long way from a full recovery.”
Again and again, Powell referred to the poor conditions of the US labor market, even as reporters asked about the meteoric rise of GameStop Corp shares and frothy stock market prices.
Photo: Reuters
He spoke fervently about the plight of those whose lives have been upended by COVID-19, repeatedly pointing to the 9 million Americans still without jobs as a result of the pandemic.
It was a message for some Fed officials who have entertained the notion that the recovery could be stronger than expected, requiring the central bank to start pulling back on asset purchases this year.
It was also a signal to the administration of US President Joe Biden that the Fed shares its goal of getting Americans back to work as quickly as possible, and spreading the benefits of a tight labor market to African Americans and other groups frequently left behind.
As Powell spoke, stock prices slumped, posting their biggest losses since October last year on growing concerns that the rapid rise of equities in the past few months had left them overvalued. Speculation of share dumps by hedge funds whipsawed by price swings might also have contributed to the slide.
Powell declined to comment on the price gyrations in GameStop, a video-game retailer that has seen its market value skyrocket as a surge in retail buying has forced hedge funds to cover their short positions in the stock.
US Senator Elizabeth Warren, a Democratic former presidential candidate, cited the frenzy around GameStop in pressing the Biden administration to crack down on Wall Street.
“It’s long past time for the SEC [Securities and Exchange Commission] and other financial regulators to wake up and do their jobs — and with a new administration and Democrats running [the US] Congress, I intend to make sure they do,” Warren said.
While Powell steered clear of commenting on GameStop, he evinced little concern about the broad-based run-up in stock prices, saying that the Fed’s focus is on the resilience of the financial system as a whole.
“Financial stability vulnerabilities overall are moderate,” Powell said.
Although the Fed theoretically could raise interest rates to try to head off a stock market bubble, that is not something it has ever done or plans to do, he added.
Powell also played down worries about a spike in inflation as the economy enjoys what could be strong growth in the second half of this year, with newly-vaccinated Americans returning to restaurants, movie theaters and sporting events.
While some increase in inflation is likely, it would probably not be large or long-lasting, Powell said.
“We’re going to be patient” and not pull back on support for the economy on the first sign of stepped-up price pressures, he said.
In that regard, it was premature to talk about tapering the Fed’s massive purchases of US Treasury and mortgage-backed bonds, Powell said, adding that it would take “some time” to achieve the threshold for reducing them from their current clip of US$120 billion per month.
Powell, who has received the first of two shots of a COVID-19 vaccination, said that the Fed remained focused on the downside risks to the outlook and the danger that the pandemic might leave lasting scars on the economy.
“Even after the economy fully reopens, I think we are still going to need to keep people in mind whose lives have been disrupted because they’ve lost the work that they did,” Powell said. “It would be wise for the longer-run productive capacity of the country if we were to look out for those people and help them find their way back into the labor force, even if means continuing support for an additional period of time.”
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