Powell's Gloomy Outlook Spooks Markets, Fed to Pump More Stimulus

Strategic Insights -

A sober Jay Powell, chairman of the Federal Reserve, delivered a message that spooked markets on Wednesday, but also reinforced the central bank's determination to keep pumping huge amounts of monetary stimulus into the economy. Powell's gloomy stance, attributing the slowdown in the US recovery to the resurgence of the virus, was in line with the Fed's downbeat view of the short-term outlook, articulated in its recent statement. The Fed's cautious tone and assertion that the economy is far from reaching its employment and inflation goals added to the already negative sentiment in the market, exacerbating the downside.

Key Takeaways:

  • The US recovery has slowed due to the resurgence of the virus, according to Fed Chairman Powell, with the economy still far from reaching its employment and inflation goals.
  • The Fed will continue to pump huge amounts of monetary stimulus into the economy, dismissing suggestions of tapering its asset purchases.
  • Powell's comments addressed the recent speculation about the prospects of the Fed beginning to wind down its $120 billion monthly asset purchase program as early as this year.
  • The Fed chair emphasized that any talk of tapering was "premature" and pledged that any plans to consider an exit strategy would be clearly communicated well in advance.
  • Powell also made clear that the Fed would avoid using monetary policy to stamp out any asset price bubbles.
  • The central bank will not overreact to any quick improvement, even if it involves a sudden inflation spike, with Powell welcoming slightly higher inflation.
  • The Fed chair noted that technology can replace people even more than thought, and that policymakers may need to address structural damage to the economy once the recovery is complete.

Statistics:

  • The S&P 500 closed lower by nearly 3% on Wednesday, its largest drop since October.
  • The Fed's monthly asset purchase program stands at $120 billion.
  • The Fed has not explicitly stated its plans for exit strategies or tapering.

Sources:

  • "Byline: JAMES POLITI WASHINGTON COLBY SMITH NEW YORK"
  • "Jim Caron, a portfolio manager at Morgan Stanley Investment Management"
  • "Chris McReynolds, head of US inflation trading at Barclays"
  • "Krishna Guha of Evercore ISI"
  • The Federal Reserve's statement on its website.